The Hidden Costs of Quitting: Why Consulting a CPA Before Resigning Can Save You Thousands
- MDP Accounting & Tax
- Mar 26
- 4 min read
Quitting a job after many years of service often feels like a fresh start, a chance to take a well-earned break or move on to new opportunities. But what if the way you handle your long service leave payout could cost you thousands of dollars? This is exactly what happened to one of my clients recently. After 30 years of service, her long service leave payout was over $55,000. Yet, she missed out on nearly $6,000 in superannuation contributions and a valuable break because she chose to have the leave paid out instead of taking time off. On top of that, she paid more tax than necessary because she didn’t salary sacrifice or package her payout.
This story highlights a crucial but often overlooked step before resigning: consulting a qualified CPA and tax agent. Understanding the tax and superannuation implications of your exit options can save you a significant amount of money and set you up for a better retirement.
Calculating tax implications of long service leave payout
Understanding Long Service Leave and Its Payment Options
Long service leave (LSL) is a benefit earned by employees who have worked with the same employer for a long period, typically 10 years or more. It allows employees to take extended paid leave as a reward for their loyalty and service. When an employee resigns or retires, they often have two choices regarding their accrued LSL:
Take the leave as time off
Have the leave paid out as a lump sum
Each option has different financial and tax consequences.
Taking Time Off as LSL
When employees take their LSL as time off, they continue to receive their regular salary during the leave period. Importantly, superannuation contributions are still made on their salary at the standard rate (currently 12%). This means the employee benefits from both the break and ongoing super contributions, which can significantly boost retirement savings.
Having LSL Paid Out
If employees choose to have their LSL paid out, the payment is treated as an ordinary income lump sum. While this might seem like an immediate financial gain, it comes with drawbacks:
The payment is subject to income tax at the employee’s marginal tax rate.
Superannuation contributions are not made on the payout.
The employee misses out on the opportunity to take a break, which is often the original purpose of LSL.
In my client’s case, the payout was over $55,000, but she lost nearly $6,000 in super contributions she would have received if she had taken the leave as time off.
The Impact of Missing Super Contributions
Superannuation is a powerful tool for building retirement savings. Even a few thousand dollars more in super contributions can grow substantially over time due to compounding interest. Missing out on $6,000 in super contributions is not just a short-term loss; it can reduce the total retirement nest egg by tens of thousands of dollars over the years.
For example, assuming an average annual return of 7%, $6,000 invested today could grow to over $33,000 in 30 years. This illustrates how important it is to maximize super contributions whenever possible.
Tax Implications of LSL Payouts
Another factor that often catches employees off guard is the tax impact of having LSL paid out. Unlike salary paid during leave, which attracts super contributions and may be taxed at a lower effective rate, lump sum LSL payments are taxed as income. This can push employees into a higher tax bracket, increasing their tax bill.
Salary Packaging and Sacrificing
One way to reduce tax on LSL payouts is through salary packaging or salary sacrificing. This involves directing part of the payout into superannuation before tax, reducing taxable income and increasing retirement savings. Unfortunately, my client did not elect to do this, which meant she paid more tax than necessary.
Why Employers and HR May Not Provide This Advice
Employers and HR departments often focus on administrative and compliance aspects of employee exits. They may not have the expertise or incentive to advise employees on the tax and financial planning side of things. This leaves employees vulnerable to making costly decisions without fully understanding the consequences.
How a Qualified CPA and Tax Agent Can Help
A qualified CPA and tax agent can provide tailored advice based on your financial situation, helping you:
Understand the tax and superannuation implications of taking LSL as time off versus payout.
Explore salary packaging or sacrificing options to reduce tax.
Plan the timing of your resignation and payouts to minimize tax impact.
Maximize your retirement savings through smart tax planning.
By reviewing your plans with an accountant before resigning, you can avoid costly mistakes and make decisions that support your long-term financial goals.
Practical Steps to Take Before Resigning
If you are considering resigning and have accrued long service leave, here are some practical steps to take:
Consult a CPA or tax agent early
Discuss your options and get advice on the best approach for your situation.
Review your superannuation strategy
Consider salary sacrificing or other ways to boost your retirement savings.
Evaluate the tax impact
Understand how your payout will be taxed and plan accordingly.
Consider taking time off
If possible, taking LSL as leave rather than payout can provide both a break and ongoing super contributions.
Plan your resignation timing
Sometimes delaying or advancing your resignation date can affect tax outcomes.
Real-Life Example Recap
My client’s experience shows the real cost of not seeking professional advice. With 30 years of service, her $55,000 LSL payout seemed like a windfall. But missing out on $6,000 in super contributions and paying extra tax meant she lost thousands of dollars. A simple consultation with a CPA before resigning could have helped her:
Take some leave to earn super contributions
Salary sacrifice part of the payout
Reduce her tax bill
Enjoy a well-deserved break
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