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Leave Entitlements Upon Retirement

Retirement is a big milestone in the journey of life and comes with many decisions to be made.  Planning ahead can ensure you make the most of your situation and this includes understanding your Leave Entitlements (Long service Leave and Annual Leave).

For those of you with lengthy employment service (sounds like a Baby Boomer and Gen Xer to me) leave payments may be a significant component of termination entitlements. With that in mind, there may be some strategic considerations in dealing with leave entitlements which may be helpful to provide that final boost to retirement savings.

You may be able to receive leave entitlements either as a lump sum upon termination or subject to agreement with your employer, in the form of ongoing payments while continuing to be employed. Whether leave is taken as a lump sum upon termination or as an ongoing leave payment has a number of impacts on matters such as super contributions, tax and social security. Subject to the employer’s agreement, the ability to receive leave as an ongoing payment while continuing to be employed may also be useful for those of you who can’t wait to finish up performing actual work but wish to maximise any available strategic considerations.

Super Guarantee:

SG is not compulsorily payable by an employer if you receive leave entitlements as a lump sum upon termination. Please note, an employer may still have a SG liability on lump sum termination leave payments if the employer is late in paying SG (generally, outside the 28 days after the end of the quarterly period). On the other hand, SG is payable if the person goes on leave and receives leave entitlements as an ongoing payment.


Spreading taxable income over 2 financial years:

Depending on the terms and conditions of employment, it may be possible for an employee to be on paid or unpaid leave or receive leave at reduced pay which may be helpful in extending employment beyond the current financial year.

Where your income is projected to be lower in the next financial year resulting in comparative lower tax brackets, there may be tax benefits in receiving the leave entitlements in the next financial year. Depending on the level of overall taxable income and amount of leave entitlements, this may be specifically relevant given the stage 3 tax cuts commencing from 1 July 2024.

Applying the same concept, spreading taxable income over two financial years may be useful in minimising Division 293 tax as well if, with the inclusion of leave, your income would exceed $250,000.

Extending employment to the next financial year may also unlock opportunities to reduce overall taxable income through the use of concessional contributions for another financial year, potentially helping to save tax if income is in excess of the tax-free threshold.

Other considerations of receiving leave as an ongoing payment

  • May lead to further accrual of leave, although potential benefits perhaps may be small

  • Extending service period with the employer which may be relevant for those of you with defined benefit funds, subject to fund rules.

  • Benefit of incremental remuneration increase and the impact on the value of leave entitlements where employer provides routine indexation

  • Benefits of being an employee such as staff discounts and salary packaging for items such as mobile phones and laptops

Obviously there are individual circumstances that will need to be considered.  Speak to your tax accountant or adviser before finalising your retirement.

General Advice Warning - This communication has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial or tax adviser before making any investment decisions.



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