Accrued leave: take a holiday or take the payment?

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, super 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.

You could increase your retirement savings by a nice little bonus by taking those holidays before you retire!

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

If you’re aged 67 to 75 and are looking to contribute one last chunk of money to super after you retire, be aware of the “work test” that applies to claim a tax deduction for those super contributions.  If you haven’t worked for 40 hours in a 30-day consecutive period in the financial year when you make the contribution, you don’t meet the work test that is required to claim a tax deduction for your personal super contributions. 

However, there is once-off exception for people with less than $300,000 in super, which allows them to use the “work test exemption”. You can still claim tax deductions for your personal super contributions if you worked for 40 hours in a 30-day consecutive period in the financial year before the financial year of your contribution. This is designed for newly retired people to extend their eligibility for one more year.

By taking your holidays now (instead of taking your accrued leave as a lump sum payment), and clocking up 40 work hours in a month in the next financial year, you may be able to extend the time you have to contribute to super.

Tax

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

When deferring retirement into a new financial year by taking leave, you may increase the cap for concessional tax treatment of employment termination payments like golden handshakes. 

Additionally, you may have a lower marginal tax bracket in the new financial year, if you don’t have other taxable income after retiring.

Social security

If you’re looking to claim the Age Pension when you retire, a lump sum received on retirement won’t count towards the Centrelink income test, but it will be an assessable asset, depending on how you invest it. So taking that accrued leave as a lump sum could push some people over the assets limit to receive the Age Pension.

On the other hand, your pay while on holidays won’t be counted in determining whether you qualify for Age Pension after you retire.

Conclusion

The decision between taking leave or a lump sum affects superannuation, tax and social security outcomes. Taking leave can provide more super contributions, tax flexibility and additional leave accrual, while taking the entitlement as a lump sum at retirement may allow earlier access to social security and, in some cases, favourable tax treatment. 

Taking your accrued leave as a holiday or as a lump sum is just one of the myriad of financial considerations to make when retiring. Speaking with your tax adviser about your personal situation, well in advance of retirement, can pay off in so many ways.