Lightning McQueen wrote:Does anyone know if you cash in some annual leave do you get taxed at a higher rate or is it just a myth?
Seek financial advice relevant to your own situation, blah blah blah.
Ok, there are a few things at play here, which depending on where you sit and how you view things and how your employer does the payment that will change how you view the answer to the question, have I been taxed at a higher rate?
Scenario 1:
Lets say you earn $115k, you're in the 32.5c bracket. - tax brackets available here:
https://www.ato.gov.au/rates/individual ... tax-rates/If you get paid out $10k worth of leave, that puts half that 10k in the 32.5c bracket, and then the second 5k goes in the 37c bracket.
So yes, that portion of your annual leave payout will get taxed at a higher rate than your normal pay.
Now, the next option.
Scenario 2:
Lets say you earn $100k, and get paid out $10k of annual leave. You are still within the 32.5c bracket (as your total remains under $120k).
However, some people will still say they have been taxed at a higher rate based on their average tax paid.
EG: On the base 100k, you've paid nil on your first 18.2k, 19c on the income from 18.2-45k, and 32.5c for everything from 45k to 100k. This gives a total tax paid of $22,967. This gives them an effective tax rate of 23c in the dollar over their 100k, so then when their extra 10k gets taxed at 32.5c they feel that their are being taxed at a higher rate than normal.
So you might answer yes or no, depending on how you view this scenario.
FWIW, I say that's its a no, as you are getting taxed the same if your base pay was 110k, or if it is 100k plus 10k of annual leave paid out.
Now for the third option:
Scenario 3:
You're within the same bracket, however your company payroll lady doesn't really understand how the tax system works. Sure they have a broad understanding, but don't get the finer details. You usually get paid fortnightly, and on 100k, that's 4k per pay period (rounded) before tax. Now in this pay, you get 'paid' $14k as you have your $10k of paid out annual leave in there.
So the payroll lady looks at the fortnightly tax tables, which assume that's your pay every fortnight, and they tax you as if you are going to earn 350k over the year (14k x 25ish fortnights). So all of a sudden you are up in the Gina Reinheart brackets and getting done at 45c/dollar.
Now, people 100% will say yes, you've been taxed at a higher rate. However, what they fail to consider is that those extra 12.5c per dollar you've paid, you will get it back when you do your tax return and they see your yearly income was 110k, not 350k. So after your tax return has been processed, you have NOT paid extra tax by getting your annual leave paid out, you just happened to have forced savings for the period between when you got paid and when you did your tax return.
Happy to explain further if the above has raised any questions for you.
Also happy to do it via PM if you want to talk specific numbers without broadcasting it over the internet for all the others to read.
But in short, no, the tax system is set up in such a way that you won't pay more tax than you should have to.