Can I please know the tax treatment of unused Purchased Leave where the employee’s termination is due to a genuine redundancy. Should this payment be taxed at marginal rates or at the rate of 32% as lump sum A tax? Thanks
G'day @BhagyaA 👋
You might be unaware, but there are three different models for Purchased Leave (at 16m 40s) 🤓
Perhaps you use the second model? Where the employee/employer agree to sacrifice pre-tax salary and then pay it back when an absence is taken? If that's the case, then if they terminate without exhausting the balance, you refund it back to the employee as refund of salary sacrifice 😉
As with most lump sums, it's marginally taxed as per Schedule 5.
Deanne
Thanks, Deanne. Yes, we use the second method. Currently, we apply marginal tax to any unused purchased leave paid out on termination, regardless of the termination type, which aligns with your advice.
I also contacted the Australian Payroll Association, and they advised that they are awaiting confirmation from the ATO on the correct tax treatment. However, their preliminary view is that in the case of a genuine redundancy, unused purchased leave should be taxed at 32% and reported as Lump Sum A.
😯 er, ok ...
Hi @BhagyaA,
As @PayrollDeanne said, where purchased leave is funded through salary sacrifice, any unused balance paid out on termination is treated as a refund of salary sacrifice, not as a leave entitlement.
Because of that, the payment is treated as ordinary assessable income and withheld at marginal rates, rather than being reported as Lump Sum A. This treatment applies regardless of the termination reason, including genuine redundancy.
Lump Sum A reporting at the 32% rate applies only to certain termination payments (such as unused annual leave or long service leave) and doesn’t extend to salary‑sacrificed purchased leave.
So, your current approach of applying marginal tax to these payments aligns with the rules for refunds of salary sacrifice arrangements.
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