July 1 2024

Is super paid on long service leave?

Generally, super is paid on long service leave – but there’s a bit more to it. If you decide to take your long service leave during your employment, you'll be eligible for the Superannuation Guarantee (SG) contributions from your employer because it counts as ordinary time earnings (OTE). But if you choose to cash out your unused long service leave as a lump sum payment when your employment ends, you won't get SG contributions paid on that amount. 

Long service leave scenario Qualifies for SG contributions?
Taken as leave during employment Yes
Taken as a lump sum payment when employment ends No
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What are ordinary time earnings (OTE)?

OTE is the amount you earn for your ordinary hours of work. It’s used to work out the minimum super contribution that your employer must pay you. OTE includes things like commissions, shift loadings and some leave payments such as annual leave. However, it doesn’t include leave payments like unused long service leave when your employment ends.

Visit the ATO website for more details on which payments are considered OTE for SG purposes.

Should I take long service leave as a lump sum payment?

It’s possible to take any unused long service leave as a lump sum payment at the end of your employment. But just because you can, doesn’t necessarily mean you should. What’s right for you boils down to your personal circumstances and financial goals.

One of the biggest drawbacks of taking long service leave as a lump sum payment is not receiving SG contributions. That’s at least 11.5% of your OTE that you could be missing out on, with the SG contributions rate scheduled to increase to 12% by July 2025.

Getting a lump sum could come with tax implications, which could reduce the amount that actually ends up in your pocket. If you want to know more, speak with a tax accountant, who can provide advice on your financial situation.

On the other hand, choosing a lump sum payment means you get access to a substantial amount of money at once. This can be particularly helpful if you’ve got a big-ticket expense planned, like going on an extended holiday, renovating your home, paying down your mortgage, or even starting a business. You could also use this lump sum to make a voluntary contribution to your super.

It’s important to think about your own situation and weigh up the pros and cons for each option before you make a decision.

What impact does super and long service leave have on retirement planning?

When you think about long service leave, you might be focused on the here and now. But for those who are nearing retirement age, there’s more to consider when deciding whether to use the long service leave while remaining employed or whether to cash it out.

Continue to build your super

If you take your long service leave as time off during your employment, your employer will continue to make contributions to your super. This means that, even as you're not actively working during this period, you're still building up your retirement nest egg with additional funds.

Now, you might be thinking: "I'm close to retirement, so how much of a difference can these additional super contributions really make?" While it's true that the impact might be less significant than for someone in their 30s or 40s, these contributions still matter. Every dollar counts, especially as these years may likely be your highest-earning ones. In the time leading up to retirement, maximising your super balance could help make a difference to your later years.

Potential tax benefits

One of the reasons why super can be a great way to save for retirement is because it can be tax effective. SG contributions made to your super fund by your employer are generally taxed at 15%, which is often lower than income tax rates. The same goes for your super investment earnings which are generally taxed at 15% while your account is in accumulation phase. On top of this, when you convert your account to an income stream, earnings within the fund are generally tax-free. However, if your annual income and concessional super contributions are above $250,000, there’s an extra tax charged at 15% of the excess over the threshold ($250,000) or the taxable super contributions, whichever is less. This is called the Division 293 tax1.

Importantly, once you reach the age of 60, withdrawing funds from your superannuation account is generally tax-free2. So, not only can you potentially build up more in your super thanks to the lower tax rate, but you generally also get to enjoy those savings without having to pay tax once you reach the age of 60. This could be a big one to think about if you’re aged 60-plus or close. 

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Need help making a decision?

If you’re a Rest member, you can get simple personal advice from a Rest Adviser at no additional cost. For advice on more complex topics, like retirement planning, the cost will depend on the topic and your circumstances. We’ll always talk to you about any fees first.

1. If you are liable to pay Division 293 tax, the ATO will send you a notice and you can either pay this tax liability with your own money or release the amount from your superannuation account.

2, Provided the withdrawal does not contain an untaxed element within the taxable component. 

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