Tax on Long Service Leave When Resigning: Rates and Withholding

When you resign in Australia, tax on your long service leave payout is worked out by splitting the lump sum according to when the leave was earned. Leave accrued after 17 August 1993 is taxed at your marginal rate, leave accrued between 16 August 1978 and 17 August 1993 attracts a flat 32%, and only 5% of any pre-16 August 1978 leave is included in your assessable income. Because you’re resigning rather than being made redundant, the post-1993 slice, which for most workers is the largest, is taxed at your marginal rate instead of the flat 32% a redundancy would attract.¹

The Three Accrual Periods and Their Rates

The ATO doesn’t treat your payout as a single amount. It divides the payment based on when you earned the leave, and each slice is taxed differently. For a voluntary resignation, which the ATO calls a “normal termination,” the rates are:

Pre-16 August 1978: Only 5% of this portion is included in your assessable income and taxed at your marginal rate. The remaining 95% is effectively tax-free.
16 August 1978 to 17 August 1993: A flat 32% withholding applies to the full amount, regardless of your income level.
Post-17 August 1993: The entire amount is taxed at your marginal rate, which can range from 0% to 45% depending on your total income for the year.

Most workers resigning today accrued the bulk of their leave after 1993, so the marginal rate calculation is what usually matters. If your regular salary plus the leave payout pushes your total taxable income above $190,000, the top 45% rate applies to the excess. Add the 2% Medicare levy and the effective rate on that portion reaches 47%.¹

The small number of workers with pre-1978 balances get a genuinely generous deal. On a $20,000 pre-1978 component, only $1,000 is assessable.

Why Resigning Costs More Than Being Made Redundant

This is the detail that catches people off guard. If you’re made genuinely redundant, have your employment terminated due to invalidity, or leave under an early retirement scheme, the post-17 August 1993 component of your long service leave is taxed at a flat 32%. When you resign voluntarily, that same component is taxed at your marginal rate, which for most full-time professionals sits at 30% or 37% and can reach 45%.¹

The pre-1978 and 1978–1993 slices are taxed the same either way. Only the post-1993 slice moves, and for modern workers that’s usually most of the payout. If you’re earning above $135,000 before the leave payout hits, voluntary resignation means your post-1993 leave is taxed at 37% or 45% rather than the flat 32% a redundancy would attract. On a large payout, that gap can add thousands to your tax bill.

Medicare Levy on Top

The 2% Medicare levy applies on top of the rates above. It’s calculated on your total taxable income for the year, which includes the leave payout. For the post-1993 component taxed at marginal rates, the levy effectively adds 2 percentage points to whatever bracket you fall into. For the 1978–1993 component taxed at a flat 32%, the Medicare levy is picked up through your overall annual assessment rather than withheld separately at the time of payment.²

A large payout can also push your income above the Medicare Levy Surcharge thresholds for the year. The surcharge ranges from 1% to 1.5% for higher earners and only applies if you don’t hold adequate private hospital cover. Check your policy before your resignation takes effect.

How Your Employer Calculates the Withholding

The flat-rate components (32% on the 1978–1993 slice, and 5% of the pre-1978 slice at marginal rates) are straightforward. The post-1993 marginal calculation is more involved. Your employer doesn’t simply apply your top bracket to the lump sum. Instead, the ATO requires a spreading method:

Calculate the normal PAYG withholding on your regular pay for one pay period.
Divide the leave payout by the number of pay periods in a year (52 for weekly, 26 for fortnightly, 12 for monthly).
Add the per-period leave amount to your normal gross earnings for one pay period.
Look up the PAYG withholding on that combined figure.
Subtract the normal withholding from that combined-figure withholding to isolate the tax attributable to the leave portion.
Multiply by the number of pay periods in a year to get the total withholding on the leave payout.

Spreading stops the entire lump sum from being treated as if you earned it in a single pay period, which would push the withholding unrealistically high. There’s a small-payment exception too: if your post-1993 leave payout combined with any unused annual leave is less than $300, your employer simply withholds 32%.³

The withholding is an estimate, not your final bill. When you lodge your return, the ATO recalculates your actual liability across all income for the year. Over-withholding produces a refund; under-withholding leaves you owing the difference.

You May Not Get a Payout at All

Long service leave entitlements are set by state and territory legislation, not federal law, so the rules vary depending on where you work. Full entitlement generally requires 10 years of continuous service with one employer. Pro-rata entitlements for service between 7 and 10 years exist in most jurisdictions, but some states restrict pro-rata payouts on voluntary resignation to specific circumstances like illness or pressing domestic necessity. Others allow pro-rata payouts regardless of the reason for leaving after 7 years.

Resign before the minimum threshold in your state and you typically forfeit the accrued leave entirely. A worker at 6 years and 11 months of service who resigns could walk away from tens of thousands of dollars in leave entitlements. Check your state or territory’s legislation before giving notice, because even a few extra weeks of employment could cross the eligibility line.

Practical Steps Before You Resign

A few moves can reduce the tax hit on a substantial payout.

Check your payslips and employment records to confirm the accrual dates. The boundary between the 32% flat-rate period and the marginal-rate period is 17 August 1993, and getting the split wrong by even a few pay cycles can shift thousands of dollars between tax treatments.

Think about the timing within the financial year. A payout received in a year where your other income is lower, for example if you plan to take time off before starting a new role, will attract a lower marginal rate on the post-1993 component. Resigning in July means the payout falls at the start of a new financial year with minimal other income stacked on top of it.

Request a detailed breakdown from your payroll department showing the gross amount split by each accrual period, the withholding rate applied to each component, and the Medicare levy. That statement is your proof the correct rates were used, and you’ll need it if the pre-filled figures in your tax return don’t match your records.⁴

1
Australian Taxation Office. Tax Table for Unused Leave Payments on Termination of Employment
2
Australian Taxation Office. Tax Rates – Australian Resident
3
Australian Taxation Office. Calculate the Correct Amount to Withhold
4
Australian Taxation Office. Your ETP End of Year Statement and Your Tax Return