Long service leave payment to attract rates

Payments on long service leave made upon termination of employment will attract concessional rates of salary or wages tax.

This follows changes to Section 46B of the Income Tax Act and Rates Act in regards to Long Service Leave Paid on Termination.

In the 2018 Budget, changes were made to Section 46B of the Income Tax Act and the Rates Act in order to rationalise the treatment of certain payments made to employees on termination of employment.

From 1 January 2018, certain payments of long service leave, made upon termination of employment, attract concessional rates of salary or wages tax.

For payments of long service leave, made on termination of employment, a new Section 46B(2) has been inserted to include long service leave accrued at a rate not exceeding 6 months per 15 years of service.

These payments are to be taxed under Section 1(2) of the Income Tax (Salary or Wages Tax) (Rates) Act 1979. The effect of these changes is that qualifying payments of long service leave are taxed at 2 percent.

In addition, a new Section 46(2B) has been inserted that states that long service leave accrued at a rate not exceeding 6 months per 15 years of service is paid as part of a termination payment shall be deemed to be salary or wages income taxable at the rate declared by Section 1(3A) of the Income Tax (Salary or Wages Tax) (Rates) Act 1979.  

A new Section 1(3A) of the Income Tax (Salary or Wages Tax) (Rates) Act 1979 has been inserted into the Rates Act that shows a table that specifies the rate of tax to be applied to long service leave paid as part of a bona fide termination payment and accrued at the specified rate.

The changes to Section 1(3A) of the Rates Act specify that for long service leave (LSL) accrued for a period less than 5 years, the marginal rate of salary or wages tax must be applied.

  • For LSL accrued over a period exceeding 5 years but not exceeding 9 years a rate of 15 percent must be applied.
  • For LSL accrued over a period exceeding 9 years but not exceeding 15 years a rate of 8 percent must be applied.

These concessional rates of salary or wages tax only apply to payments made as part of a bona fide termination payment. If the long service leave is “cashed in”, marginal tax will apply.

If the long service leave is taken as leave and the employee continues to be employed then they are taxed at the normal fortnightly rates of salary or wages tax.

Author: 
Cedric Patjole