Sick Leave Payout Tax Calculator Australia (FY 2025-26)

When leaving a job, many Australian workers wonder what happens to their unused sick leave — also known as personal leave. Unlike annual leave, sick leave doesn't always get paid out when your employment ends. However, there are circumstances where you may receive a payout, and understanding how it's taxed can help you plan your finances. This comprehensive guide explains when sick leave is paid out, how much tax you'll pay in FY 2025-26, and what factors affect your final take-home amount.

Is Sick Leave Paid Out When You Leave a Job?

Under Australia's Fair Work Act, the rules for sick leave (personal leave) payouts are quite different from annual leave. Generally speaking, unused sick leave is not paid out on resignation or normal termination. This is because personal leave is designed to be used when you're genuinely unwell — it's not an accrued benefit that converts to cash when you leave.

However, there are specific situations where you may receive a sick leave payout. The most common scenario is when your employment contract, enterprise agreement, or award specifically entitles you to a payout for unused sick leave. Some industries, particularly in the public sector and certain union-negotiated agreements, include this benefit. Additionally, if you're receiving a redundancy package, your employer may include unused sick leave as part of the overall termination payment, though this is at their discretion unless required by your award.

Another situation where sick leave may be paid out is upon retirement or death. Some long-serving employees have legacy entitlements that provide for sick leave payout at retirement. It's important to check your specific employment conditions to understand whether you're entitled to a payout, as the rules vary significantly between industries and employers.

How Is Sick Leave Payout Taxed in Australia?

When sick leave is paid out, the Australian Taxation Office (ATO) treats it as ordinary income. This means the payout is taxed at your marginal income tax rate — the same rate that applies to your regular salary. Unlike Employment Termination Payments (ETPs) or certain redundancy payments, sick leave payouts don't receive any special concessional tax treatment.

The amount of tax you'll pay depends on your total taxable income for the financial year. The payout is added to your other income (salary, bonuses, other termination payments) and taxed according to the progressive tax brackets that apply for FY 2025-26. This means if the sick leave payout pushes your total income into a higher tax bracket, that portion will be taxed at the higher marginal rate.

In addition to income tax, the 2% Medicare levy applies to sick leave payouts. If your total income exceeds certain thresholds, you may also be liable for the Medicare Levy Surcharge (MLS) if you don't have appropriate private hospital cover. Understanding these additional obligations is important when estimating your net payout amount.

Your marginal rate is calculated on your total income for the entire financial year. Use our Income Tax Calculator to see exactly how these brackets apply to your specific situation and income level for FY 2025-26.

Worked Example: Sick Leave Payout Tax Calculation

Let's walk through a practical example to understand how sick leave payout tax works. Sarah is a public sector employee who has accumulated significant sick leave over her 15-year career. Under her enterprise agreement, she's entitled to a payout of 50% of her unused sick leave balance upon retirement. She has 80 days of unused sick leave, and her final salary is $95,000 per year.

Sarah retires in December 2025, having worked 6 months of the financial year. Her salary income for the year is $47,500. With the sick leave payout of $14,615, her total taxable income becomes $62,115. This places her in the $45,001–$135,000 tax bracket, where her marginal rate is 30% plus 2% Medicare levy (32% total).

Sarah will pay approximately $4,677 in tax on her sick leave payout, leaving her with around $9,938 after tax. This example illustrates how the payout is treated exactly like ordinary salary for tax purposes — there's no special concessional rate that applies.

How Sick Leave Payout Affects Your Other Tax Obligations

Receiving a sick leave payout can have ripple effects across your entire tax situation. Because it's treated as ordinary income, the payout is included in your repayment income for HECS-HELP purposes. For FY 2025-26, the HECS repayment threshold is $67,000. If the sick leave payout pushes your total income above this threshold, you'll need to make a compulsory repayment on the excess amount — calculated at 15% for income up to $125,000.

The payout may also affect your liability for the Medicare Levy Surcharge (MLS). If your total income exceeds $101,001 for singles (FY 2025-26) and you don't have private hospital cover, you'll pay an additional 1% to 1.5% on your income. A sick leave payout could push you over this threshold, triggering the surcharge unexpectedly. Check your exposure using our Medicare Levy Calculator.

Another consideration is the Low Income Tax Offset (LITO). This offset provides up to $700 in tax relief but phases out completely once your income exceeds $66,667. If a sick leave payout pushes you over this threshold, you'll lose the full LITO benefit, effectively increasing your tax rate on the payout portion. Additionally, your employer is generally not required to pay superannuation guarantee contributions on sick leave payouts, as these aren't considered ordinary time earnings.

Sick Leave Payout vs Other Termination Payments

When you leave employment, you may receive several different types of payments, each with its own tax treatment. Understanding the differences can help you plan and ensure you're being taxed correctly. Here's how sick leave payouts compare to other common termination payments for FY 2025-26:

As you can see, sick leave payouts fall into the same category as annual leave — both are taxed at marginal rates as ordinary income. They don't qualify for the concessional ETP rates that apply to golden handshakes or gratuities. If you're receiving multiple types of payments, your employer should provide a detailed breakdown on your final payslip showing how much tax was withheld from each component.

Strategies to Minimise Tax on Your Sick Leave Payout

While you can't change the fact that sick leave payouts are taxed as ordinary income, there are strategies you can use to potentially reduce the overall tax impact. One option is to time your departure strategically. If you have flexibility in when you retire or resign, consider leaving early in the financial year (July or August). This way, you'll have earned less salary during that financial year, potentially keeping your total income — including the sick leave payout — in a lower tax bracket.

Another strategy is to use salary sacrifice to superannuation in your final months of employment. By making additional pre-tax super contributions, you can reduce your taxable income for the year. This might help keep your marginal rate lower when the sick leave payout is added. However, be mindful of the concessional contributions cap of $30,000 for FY 2025-26, which includes your employer's SGC contributions. Our Salary Sacrifice Calculator can help you model different scenarios.

If you're planning to use the sick leave payout for retirement savings, consider making a personal deductible super contribution from the after-tax amount. While this doesn't reduce the tax on the payout itself, it may provide a tax deduction on your return, effectively offsetting some of the tax paid. However, this strategy requires careful planning as it affects your Division 293 tax liability if your income exceeds $250,000.

What to Check on Your Final Payslip

When you receive your final pay including a sick leave payout, it's essential to review your payslip carefully to ensure everything has been calculated correctly. Your employer should clearly separate the sick leave payout from other termination payments and show the tax withheld specifically for this component. The payslip should also indicate whether superannuation has been paid on any portions of your termination package.

Common issues to watch for include incorrect tax withholding rates (sometimes payroll systems mistakenly apply ETP rates to sick leave), missing superannuation on notice periods that should attract SGC, and incorrect HECS calculations if the system doesn't account for your total annual income correctly. If anything looks amiss, raise it with your payroll department before your employment ends, as corrections are easier to make while you're still in the system.

At the end of the financial year, you'll receive a payment summary or income statement through myGov that breaks down your termination payments. Keep this documentation safe, as you'll need it to complete your tax return accurately. If you've received multiple types of payments, the ATO's pre-fill data should capture everything, but it's always worth double-checking against your own records.

Summary: Key Takeaways

• Unused sick leave is not automatically paid out on termination — only if your award, agreement, or contract specifically requires it
• When paid out, sick leave is taxed at your marginal income tax rate as ordinary income (no concessional rates apply)
• The 2% Medicare levy applies, and the payout may trigger Medicare Levy Surcharge if you're over the threshold without private cover
• Sick leave payouts count toward HECS-HELP repayment income and can trigger compulsory repayments above $67,000
• Your employer does not pay superannuation guarantee on sick leave payouts
• Timing your departure or using salary sacrifice may help reduce your overall tax rate
• Always review your final payslip carefully to ensure correct tax withholding

This article is for general information only and does not constitute tax advice. Tax rules can be complex and individual circumstances vary. Please consult a registered tax agent or financial adviser for advice specific to your situation. All figures are based on ATO guidelines for FY 2025-26.