How Much Tax Do You Pay on Long Service Leave in Australia?

How much tax you pay on long service leave in Australia depends on two things: whether you take the leave while still employed or cash it out when your job ends, and, if it’s a payout, when the leave was earned. Leave taken while you’re still working is taxed like any other pay. A payout on termination is split across up to three date-based periods, with tax ranging from just 5% of the payment being assessable (pre-16 August 1978) to a flat 32% (16 August 1978 to 17 August 1993) up to your full marginal rate (after 17 August 1993). A genuine redundancy caps that top slice at 32% too.

Leave Taken While You’re Still Employed

If you take long service leave and stay in the job, the payment is taxed exactly like your regular salary. Your employer runs it through standard PAYG withholding using the same tax tables and marginal rates that apply to your normal pay cycle.¹ Nothing about the calculation is special. The income is included in your gross earnings for the year, and there are no surprises at tax time.

Unused Leave Paid Out When You Leave

When your employment ends for any reason — resignation, retirement, dismissal, or redundancy — any accrued but unused long service leave is paid as a lump sum. This is where the tax treatment gets more complicated, because the rate depends on when the leave was earned, not when it’s paid. The ATO divides your entitlement into up to three date-based periods and applies different withholding rules to each.¹

Your employer has to look at payroll records and work out how many days of leave fall into each period before finalising the payout. If you’ve been with an employer for decades, it’s worth checking the breakdown on your final payslip, because a wrong split can mean you overpay or underpay tax.

Leave Accrued Before 16 August 1978

This is the most generous slice. Only 5% of the payment attributable to this period is included in your assessable income, and that 5% is taxed at your marginal rate.¹ The other 95% is effectively tax-free. On $10,000 of pre-1978 leave, only $500 counts as assessable income. This treatment applies regardless of why you left.²

Very few current employees have leave going back this far, but for those who do, the concession is substantial.

Leave Accrued From 16 August 1978 to 17 August 1993

Leave earned during this middle window is taxed at a flat 32%, which already includes the 2% Medicare Levy. The rate applies no matter how your employment ended.¹ The cap protects higher earners whose marginal rate would otherwise be 45%, or 47% with the Medicare Levy. Even in the top bracket, this portion of your payout can’t be taxed above 32%.

Leave Accrued After 17 August 1993

This is the portion most employees are dealing with, and it carries the heaviest tax load. For a normal termination — resignation, retirement, or dismissal — this leave is taxed at your full marginal rate.¹ A large lump sum can push your income into a higher bracket, so the withholding calculation uses a spreading method rather than simply applying the top rate to the whole amount.

The employer divides the lump sum by the number of pay periods in a year, adds that figure to your normal pay for one period, calculates the withholding on the combined amount, subtracts the withholding on your normal pay alone, and then multiplies the difference back up to cover the full payment.¹ The method smooths the tax hit so withholding approximates what you’d actually owe, but reconciliation still happens when you lodge your return.

When Redundancy, Invalidity, or Early Retirement Changes the Rate

If your job is eliminated through a genuine redundancy, you leave due to invalidity, or you depart under an approved early retirement scheme, the post-17 August 1993 portion of your unused long service leave gets a tax break. Instead of being taxed at your full marginal rate, it’s capped at 32%, the same flat rate that applies to the 1978–1993 window.¹ For a high-income earner otherwise on 45% plus the 2% Medicare Levy, the saving on a large payout is significant.

The pre-1978 and 1978–1993 portions are treated the same whether you’re made redundant or leave voluntarily. The concession only changes the outcome for the newest slice of leave.

The ATO applies strict definitions. A genuine redundancy means the employer decided the job no longer needs to be done by anyone and terminated the position for that reason.³ If you’re replaced by someone in a similar role shortly after leaving, it won’t qualify. Note that unused long service leave sits outside the tax-free genuine redundancy payment itself; it doesn’t form part of that tax-free amount but receives its own concessional withholding rate.

Current Marginal Rates for 2025–26

Because marginal rates set the tax on leave taken while employed and on the post-1993 portion of an ordinary termination payout, the current brackets matter. For the 2025–26 financial year, Australian resident individual tax rates are:⁴

$0 to $18,200: no tax
$18,201 to $45,000: 16 cents per dollar over $18,200
$45,001 to $135,000: $4,288 plus 30 cents per dollar over $45,000
$135,001 to $190,000: $31,288 plus 37 cents per dollar over $135,000
$190,001 and above: $51,638 plus 45 cents per dollar over $190,000

These rates don’t include the 2% Medicare Levy, which is charged on top.⁵ So the effective top marginal rate is 47%. The 32% flat rate on the 1978–1993 and redundancy-related post-1993 slices already includes the Medicare Levy, which is why it acts as a genuine ceiling.

A Worked Example

Suppose you resign in 2026 after 30 years with the same employer and receive a $90,000 payout for unused long service leave. Payroll records split the leave as: $15,000 attributable to service before 16 August 1978, $30,000 for the period between 16 August 1978 and 17 August 1993, and $45,000 for service after 17 August 1993.

Pre-1978 portion ($15,000): only 5% — that’s $750 — is assessable and taxed at your marginal rate. The other $14,250 is tax-free.
1978 to 1993 portion ($30,000): taxed at a flat 32%, producing $9,600 in withholding.
Post-1993 portion ($45,000): taxed at your marginal rate using the ATO’s spreading method to avoid overtaxing a one-off lump sum.

If the same scenario involved a genuine redundancy instead of a resignation, the post-1993 portion would also be capped at 32% rather than your marginal rate, saving thousands if your income otherwise puts you above the 32% threshold.

Pro-Rata Payouts Before 10 Years

Long service leave entitlements are governed by state and territory legislation, and both the qualifying period and the leave amount vary across jurisdictions. Most states require 10 years of continuous service for a full entitlement, but several allow a pro-rata payout if employment ends after a shorter period, commonly seven years. These pro-rata payments receive the same tax treatment as a standard long service leave payout, split across the same three date-based periods, provided the entitlement arises under a law, award, or formal workplace arrangement.

Where a payment is purely gratuitous, with the employer voluntarily paying out a leave-like amount without being required to, it may instead be classified as an employment termination payment with different tax rules. That distinction matters most in workplaces without an award or enterprise agreement that formally provides for pro-rata access.

Payments After an Employee’s Death

If an employee dies with unused long service leave, the payment to their estate is tax-free. The employer should not withhold from unused annual leave or long service leave paid after the employee’s death, and where an estate tax return is required, these payments are not included in assessable income.⁶

1
Australian Taxation Office. Schedule 7 – Tax Table for Unused Leave Payments on Termination of Employment
2
Australian Taxation Office. CR 2013/87 – Long Service Leave Assessable Income
3
Australian Taxation Office. Genuine Redundancy Payments
4
Australian Taxation Office. Tax Rates – Australian Residents
5
Services Australia. Medicare and Tax
6
Australian Taxation Office. PAYG Withholding for Deceased Employees