Accrued leave - take a holiday or take the payment?

If retirement is on the horizon...

If retirement is on the horizon for you and you have a large amount of accrued leave, you may well be contemplating whether to:

• Take a big holiday now, or

• Just take the lump sum payment when you retire.

There are some tax, superannuation, and possibly social security implications you should consider.

Superannuation

• You receive superannuation guarantee contributions from your employer on the pay you receive while you’re on holidays.

• However, no superannuation guarantee is payable on payments of lump sum leave entitlements upon your retirement.

• Currently, the minimum superannuation guarantee rate is 11.5%, rising to 12% on 1 July 2025.

• Taking holidays before retiring could increase your retirement savings through extra super contributions.

• Taking a holiday now could also extend the time you can contribute to super.

Work Test Implications

• If you're aged 67 to 75 and want to contribute one last chunk of money to super after you retire, note the “work test” requirements.

• To claim a tax deduction for personal super contributions, you must have worked 40 hours in a 30-day consecutive period in the financial year of the contribution.

• If you haven't met this, you don’t pass the work test and can’t claim a deduction.

Work Test Exemption

• A once-off exemption is available for those with less than $300,000 in super.

• It allows you to use the work test exemption if you worked 40 hours in a 30-day period in the prior financial year.

• This is designed to give newly retired people another year to contribute.

Tip: By taking your holidays now (rather than taking accrued leave as a lump sum), and working 40 hours in the next financial year, you may extend your super contribution eligibility.

Tax

• A lump sum payment of accrued leave is taxed in the year you receive it.

• By taking leave and deferring your official retirement, you might push that lump sum into a new financial year.

• This could:

  • Increase the cap for concessional tax treatment of termination payments (like golden handshakes).

  • Lower your marginal tax rate if you don’t have other taxable income after retiring.

Social Security

• If you're applying for the Age Pension, a lump sum payment on retirement:

  • Won’t count towards the Centrelink income test.

  • Will be an assessable asset, depending on how it’s invested.

  • May push you over the asset limit, affecting Age Pension eligibility.

• In contrast, your pay while on holidays:

  • Won’t be assessed in determining your Age Pension eligibility after you retire.

Conclusion

• The choice between taking accrued leave as paid holidays or a lump sum affects your:

  • Superannuation

  • Tax position

  • Social security entitlements

• Taking leave can offer:

  • More super contributions

  • Tax flexibility

  • Additional leave accrual

• Taking a lump sum can offer:

  • Earlier access to social security

  • Potential for favourable tax treatment in certain situations

Final Advice:
Taking your accrued leave as a holiday or a lump sum is just one of many financial considerations at retirement. Consulting with your tax adviser well in advance can lead to better financial outcomes.