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.
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