Cashing Out Annual Leave: Fair Work Award Rules & Tax Withholding (2026–2027)

In Australia, taking paid annual leave as time off for rest and recreation is a fundamental right protected by the National Employment Standards (NES). However, under specific financial or personal circumstances, eligible Australian employees can request to cash out a portion of their accrued annual leave rather than taking time off.

Regulated by the Fair Work Ombudsman under the *Fair Work Act 2009*, cashing out annual leave is subject to strict statutory protections to ensure employee safety and prevent coercion.

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1. The 4 Statutory Fair Work Conditions for Cashing Out Leave

Under Section 93 (for award-covered workers) and Section 94 (for award-free employees) of the *Fair Work Act*, cashing out leave requires satisfying four statutory criteria:

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   Award or EBA Authorization:

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  The relevant Modern Award or Enterprise Bargaining Agreement (EBA) must contain a specific cashing-out clause.
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  Award-free employees can agree in writing with their employer to cash out leave.

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   Mandatory 4-Week Retained Balance:

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  The employee MUST retain at least 4 weeks (152 hours for full-time staff) of accrued annual leave after the cash-out. You cannot cash out leave below this statutory floor.

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   Formal Written Agreement on Each Occasion:

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  A separate written agreement signed by employer and employee must state the exact number of hours cashed out, the gross payout amount, and the payment date. If the employee is under 18, a parent or guardian must also sign.

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   Full Payment Guarantee (Including Applicable Loading):

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  The employee must receive the full gross amount they would have earned had they actually taken the leave, including base hourly pay plus any applicable 17.5% leave loading stipulated in their award.

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2. Typical Modern Award Limitations (Maximum 2 Weeks Per Year)

To protect employee work-life balance, standard Modern Award clauses specify that:

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  Maximum 2 Weeks: An employee cannot cash out more than 2 weeks (76 hours) of accrued leave in any 12-month period.
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  Voluntary Agreement: Employers cannot make cashing out a condition of employment, nor can they force or pressure an employee to cash out leave.

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3. Worked Example: Cashing Out 2 Weeks on an $85,000 Salary

Let's examine how the numbers work for a full-time employee earning $85,000 per year ($42.92/hr) who has accrued 7 weeks (266 hours) of annual leave and requests to cash out 2 weeks (76 hours) under an award that includes 17.5% leave loading:

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4. ATO PAYG Tax Withholding & Superannuation Rules

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  PAYG Income Tax Withholding: The cashed-out payment is treated as assessable salary and wages and taxed using ATO PAYG marginal withholding rules in the relevant pay period.
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  Superannuation Guarantee Treatment: Under ATO Superannuation Guarantee Ruling SGR 2009/2, lump-sum payments for unused annual leave paid out upon termination of employment are excluded from Ordinary Time Earnings (OTE) and do not attract Super Guarantee contributions. However, annual leave cashed out during continuing employment is generally treated as Ordinary Time Earnings (OTE) and attracts the statutory employer Super Guarantee (12.0%) contribution, unless a specific award or statutory exclusion applies.

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5. Calculate Your Leave Balance & Cash-Out Value

Need to estimate your accrued leave hours, retainable 4-week floor, hourly pay rate, and net payout value?

Use Calcivo's [Annual Leave Calculator](/calculator/annual-leave-calculator) or explore our Annual Leave Accrual & Resignation Payout Guide.