How Is Tax Calculated on Annual Leave Payouts in Australia? (ATO Rules Explained)
When you leave a job, your annual leave balance converts to cash — and the ATO has specific rules for how that cash is taxed. The method is different from ordinary income tax, and the rate depends heavily on why you’re leaving.
Annual leave paid out on termination is not taxed like a regular pay packet. The ATO applies a specific withholding method called Schedule 7 — separate from the standard Schedule 1 PAYG tables — and the effective rate depends on whether you resign, are made redundant, or leave under other circumstances. Getting this wrong is one of the most common payroll errors in Australia.
The key numbers
- Schedule 7 — the ATO’s withholding method for unused leave on termination
- Lump Sum A — how annual leave payout appears on your income statement
- Resignation/dismissal: marginal-rate averaging method (no flat rate)
- Genuine redundancy (pre-18 Aug 1993 portion): 32% concessional flat rate
- Genuine redundancy (post-17 Aug 1993 portion): marginal-rate averaging — same as resignation for most employees today
- Super is NOT owed on unused annual leave paid on termination
- Tax is reconciled at year-end in your tax return — withholding is an estimate
Why annual leave payout tax is different from ordinary pay
When you receive ordinary wages each fortnight, your employer withholds PAYG tax using Schedule 1 — which annualises your pay and applies the corresponding marginal rate. If they did the same thing with your leave payout, the result would be punishingly high: the entire payout would be treated as if you earned that amount in every fortnight of the year.
Schedule 7 exists to prevent this. Rather than annualising the lump sum at the rate for a single pay period, it spreads the calculation over the period the leave represents. The result is a lower effective withholding rate — though how much lower depends on your circumstances.
The two methods — and which one applies to you
Schedule 7 distinguishes between two broad scenarios. The method that applies determines how much is withheld from your payout before you receive it.
For the vast majority of Australian employees today — anyone who started work after 17 August 1993 — the entire leave payout is taxed using the marginal averaging method regardless of whether they resigned or were made redundant. The pre-1993 distinction is only relevant for employees with very long tenure who have leave accrued before that date.
How the marginal averaging method works — step by step
The ATO’s Schedule 7 marginal averaging calculation is not a simple percentage. It follows a specific formula:
- Calculate the leave payout amount. This is your accrued leave hours × ordinary rate (+ loading if applicable). Confirm your balance using the Annual Leave Calculator.
- Determine the number of days the leave represents. Leave hours ÷ ordinary hours per day.
- Convert to a daily amount. Payout ÷ number of days.
- Annualise the daily amount. Daily amount × 365.
- Calculate marginal tax on the annualised amount. Using the current ATO tax tables (including Medicare Levy).
- Convert back to a daily withholding rate. Annual tax ÷ 365.
- Multiply by the number of days the leave represents. This is the PAYG withholding amount.
Worked example: resignation with 4 weeks of leave
Let’s walk through a real calculation for a full-time employee resigning with a full year’s accrued leave balance.
| Step | Calculation | Result |
|---|---|---|
| Ordinary rate | Given | $38.00/hr |
| Leave balance | 4 weeks × 38 hrs | 152 hours |
| Base payout | 152 hrs × $38 | $5,776.00 |
| Leave loading (17.5%) | $5,776 × 0.175 | $1,010.80 |
| Total gross payout | $5,776 + $1,010.80 | $6,786.80 |
| Days of leave | 152 hrs ÷ 7.6 hrs/day | 20 days |
| Daily payout rate | $6,786.80 ÷ 20 | $339.34/day |
| Annualised | $339.34 × 365 | $123,859/yr |
| Marginal tax on $123,859 | ATO 2025-26 rates | ~$33,850 |
| Daily withholding | $33,850 ÷ 365 | $92.74/day |
| PAYG withheld | $92.74 × 20 days | $1,854.80 |
| Net payout | $6,786.80 − $1,854.80 | $4,932.00 |
The effective withholding rate in this example is approximately 27.3% — lower than the employee’s marginal rate on their annual salary, because the averaging method distributes the payout over 20 days rather than treating it as one pay period’s income.
Schedule 7 withholding estimator
LiveEstimates PAYG withholding on your annual leave payout using the ATO marginal averaging method. For the full net figure including loading options, use the dedicated tax calculator.
Approximate only — based on 2025-26 ATO marginal rates including Medicare Levy (2%). Actual withholding calculated by your employer’s payroll system. Use as a guide to verify the ballpark figure.
Full payout tax calculator (with loading, LSL & all options)What appears on your income statement — Lump Sum A
When your employer processes your final pay, the unused annual leave payout is reported separately on your income statement (formerly called a payment summary) under the label Lump Sum A. This is a specific ATO reporting category for unused leave paid on termination.
Lump Sum A appears separately from your gross salary in box 7 of your income statement. When you lodge your individual tax return, you declare the Lump Sum A amount, and the ATO includes it in your assessable income for that financial year. If your employer withheld too much PAYG tax, you receive a refund. If they withheld too little, you pay the shortfall.
This means the withholding calculated at termination is always an estimate — your actual tax depends on your total income for the year, deductions, and personal circumstances that your employer cannot know.
Primary calculator Calculate your exact annual leave payout tax — all termination types, loading and LSL options →Is superannuation owed on annual leave payouts?
No. This surprises many employees. Under ATO rules, unused annual leave paid out on termination is excluded from Ordinary Time Earnings (OTE) — the base on which the Superannuation Guarantee (11.5% from 1 July 2024) is calculated. Your employer does not owe super on the leave payout component of your final pay.
This contrasts with annual leave taken during employment — when you’re actually on leave, the leave pay is treated as ordinary earnings and super is payable on it at your employer’s normal SG rate.
Does leave loading change the tax calculation?
No — leave loading that forms part of a termination payout is included in the total Lump Sum A amount and taxed under the same Schedule 7 rules. It doesn’t get a separate tax treatment. The entire gross payout — base leave pay plus any loading — is treated as one figure for withholding purposes.
However, whether leave loading is payable on termination at all depends on your modern award. Most awards require it; some exclude it. If you’re unsure whether loading applies to your payout, see Annual Leave Loading Explained: Who Gets 17.5%, Who Doesn’t, and Why.
Is the tax rate on redundancy leave payout lower than resignation?
For most Australian employees today — anyone with leave accrued entirely after 17 August 1993 — no, the tax treatment is identical. Both resignation and genuine redundancy use the same marginal averaging method under Schedule 7 for the post-1993 leave portion.
The redundancy concession (32% flat rate) only applies to leave accrued before 18 August 1993. With the youngest eligible employees for this concession now in their late 40s or older, and most having exhausted or taken leave accrued before that date long ago, the pre-1993 concession is increasingly rare.
What does differ between resignation and genuine redundancy is the tax-free component of the redundancy payment itself — the ETP (Employment Termination Payment) and the genuine redundancy tax-free threshold. But those apply to the redundancy pay, not the annual leave payout. See the ATO’s unused leave payments guide →
When the payout spans two financial years
If your last day of employment falls near 30 June, your final pay — including the leave payout — may be processed in either the current or next financial year depending on when payroll actually runs. This matters because Lump Sum A is reported in the financial year the payment is made, not the financial year your employment ended.
If you’re near the end of a financial year, confirm with your payroll team which financial year the payout will be reported in. This affects which year’s tax return you declare it on, and could affect your marginal rate depending on other income in each year.
Common mistakes employers make with leave payout tax
- Using Schedule 1 instead of Schedule 7. Ordinary PAYG tables annualise your regular pay rate and apply it to the payout — producing a much higher withholding amount than Schedule 7 requires. If your payout looks over-withheld, check whether your payroll used the correct schedule.
- Omitting leave loading from the Lump Sum A amount. Leave loading payable on termination must be included in the Lump Sum A figure, not reported as ordinary earnings.
- Applying the pre-1993 flat rate to post-1993 leave. The 32% concessional rate only applies to leave accrued before 18 August 1993. Applying it to all leave is incorrect and produces under-withholding.
- Paying super on the payout. Super is not required on unused annual leave paid on termination — including any loading component.
Disclaimer: This article reflects ATO Schedule 7 withholding rules as understood at June 2026. Tax treatment of termination payments depends on individual circumstances — the ATO’s published guidance and tax tables are authoritative. For advice specific to your situation, consult a registered tax agent. WorkCalc Australia is independent and not affiliated with the ATO or Fair Work.
Frequently asked questions: tax on annual leave payouts
Plain-English answers on Schedule 7, Lump Sum A, redundancy rates, super and how the ATO averaging method works.
How is tax calculated on an annual leave payout in Australia?
Annual leave paid on termination is taxed under ATO Schedule 7 using the marginal-rate averaging method. The ATO spreads the payout over the leave period it represents rather than treating it as one pay period’s income — this produces a lower effective withholding rate than ordinary PAYG. The amount is reported as Lump Sum A on your income statement and included in your assessable income when you lodge your tax return.
What is the tax rate on annual leave payout for resignation?
There is no fixed flat rate for resignation. The marginal averaging method under Schedule 7 produces an effective rate that depends on your total income for the year. For most employees, it is lower than their top marginal rate because the payout is spread over the leave period (e.g. 20 days for 4 weeks of leave) rather than being treated as a single fortnight’s pay.
What is the tax rate on annual leave payout for redundancy?
For genuine redundancy, leave accrued before 18 August 1993 is taxed at a concessional flat rate of 32%. Leave accrued on or after 18 August 1993 is taxed using the same marginal averaging method as resignation. For most employees today — with all leave accrued post-1993 — resignation and redundancy produce the same withholding on the leave payout component.
What is Lump Sum A on a tax return?
Lump Sum A is how the ATO labels unused annual leave and long service leave paid on termination on your income statement. It is reported separately from ordinary wages because it receives different PAYG withholding treatment under Schedule 7. You declare it on your individual tax return in the “Lump sum payments” section — it is included in your assessable income for the year.
Is super paid on annual leave payouts?
No. Unused annual leave paid on termination is excluded from Ordinary Time Earnings under ATO rules, so the Superannuation Guarantee (currently 11.5%) does not apply. Note: super IS owed on leave actually taken during employment — that’s treated as ordinary earnings. Only the termination payout is excluded.
What is the difference between Schedule 7 and ordinary PAYG withholding?
Schedule 1 (ordinary PAYG) annualises your regular pay for the period and applies marginal rates. Schedule 7 treats unused leave on termination differently — it spreads the payout over the number of days the leave represents, annualises that daily amount, calculates the marginal tax, then converts back to the total withholding for the leave period. This generally produces a lower effective rate than Schedule 1 would on the same dollar amount.
Is leave loading taxed the same way as the leave payout?
Yes. Leave loading payable on termination forms part of the total unused leave amount and is included in Lump Sum A. The whole amount — base leave pay plus loading — is taxed together using Schedule 7. Loading does not receive separate tax treatment on termination.
What if my employer withheld too much or too little tax?
The withholding is reconciled at year-end when you lodge your tax return. If your employer over-withheld, you receive a refund. If they under-withheld, you pay the shortfall. The ATO’s assessment is based on your total assessable income for the year — the employer’s withholding is an estimate, not the final determination of tax owed.