Question:
I would like to know how purchased leave works. Could you please help with this?
Specifically, I would like to know how purchased leave is taxed. Is it taxed when taken or when the initial deduction is made?
I would also like to know how superannuation works when an employee purchases leave and if any additional leave is accrued on the purchased leave when taken?
Answer
When an employee purchases leave, the amount is taken out of their pay before tax is applied.
It is when they take the leave that tax is withheld.
Purchased annual leave paid on termination is taxed the same way as non-purchased annual leave on termination.
The Superannuation Guarantee (SG) amounts would be based on reduced salary.
For example, if purchasing four weeks of annual leave meant that the total salary paid reduced from $100,000 to $92,300, SG would be payable on a maximum of $92,300.
The only time that SG might be payable on a higher amount than your received salary is when you salary sacrifice super contributions.
Whilst the above relates to SG obligations, you should also check your employment agreement as it might allow for a more generous outcome.