Annual leave liability: how to work out what your team's leave really costs

Your annual leave liability is the amount you’d owe if every employee took, or was paid out, their accrued leave today. Work it out person by person: leave balance in weeks × weekly base pay, plus leave loading where their award gives it, plus super where it applies. Add the lot. Most owners have never seen that number, and it’s usually bigger than they guess.

It’s a liability that grows quietly. Nobody sends you an invoice for it, it doesn’t show up in the bank balance, and in a normal week it costs you nothing extra in cash. Then someone with seven weeks banked resigns in January, and it costs you a great deal all at once.

October is a good month to work it out. Christmas close-down notices are due soon, the new financial year’s pay rates are already in payroll, and you still have a quarter of trade to plan around whatever the number turns out to be.

What actually counts in the liability?

Three ingredients, and only the first applies to everyone.

Ingredient	Who it applies to	Where the rule comes from
Base pay for each accrued week	Full-time and part-time employees (not casuals)	The National Employment Standards: four weeks a year, pro-rata for part-timers
Leave loading	Employees whose award, enterprise agreement or contract provides it; commonly 17.5% or the weekend penalty rate if that’s higher	The award or agreement
Super on the leave	Leave taken during employment, and usually the loading too	ATO qualifying earnings rules; 12% under Payday Super

The loading point matters more than it looks. The Fair Work Ombudsman says unused leave paid out when employment ends must match what the employee would have been paid if they’d taken it, which includes loading where it would have applied. So you can’t leave the loading out of your provision on the grounds that “it’s only paid when they go on holidays”.

Super is the subtler one. Since 1 July 2026, Payday Super means the 12% follows each pay run, including pay runs where someone is on leave. The ATO’s qualifying earnings guidance treats leave loading as included unless it’s clearly tied to lost overtime. Unused leave paid out on termination generally sits outside super. For a planning figure, include super on the whole balance. It’s the safer number, and the gap is small.

How do you calculate it, step by step?

1. Export the leave balance report from your payroll software. Most systems show hours; convert to weeks by dividing by each person’s ordinary weekly hours.
2. Multiply by current weekly base pay. Use today’s rate, not the rate when the leave was earned, because leave is paid at the rate that applies when it’s taken.
3. Add loading for anyone entitled to it. If you’re not sure, check their award before you check anything else.
4. Add super at 12% on base plus loading, as a prudent planning figure.
5. Total it, and note the top three balances. The total tells you the size of the obligation. The individual balances tell you where the lumps are.

A full-time employee accrues roughly 2.9 hours of leave for every 38-hour week worked (152 hours a year ÷ 52). Payroll does this automatically, but it’s worth knowing so you can sanity-check a balance that looks wrong.

A worked example: a café with five staff

Illustrative example only. A suburban café has three full-time staff and two part-timers who each work three days a week. To keep the arithmetic clean, everyone is on the same base rate: $1,200 a week full-time, so $720 a week for the part-timers. The award provides 17.5% leave loading.

Employee	Balance (weeks)	Weekly base	Base value	Loading (17.5%)
Full-timer A	6.5	$1,200	$7,800	$1,365
Full-timer B	3.0	$1,200	$3,600	$630
Full-timer C	7.0	$1,200	$8,400	$1,470
Part-timer D	2.0	$720	$1,440	$252
Part-timer E	1.5	$720	$1,080	$189
Total			$22,320	$3,906

Base plus loading comes to $26,226. Add 12% super as a planning allowance ($3,147) and the café is carrying about $29,373 of leave it hasn’t paid for yet.

Two things stand out. First, more than half of it belongs to two people, A and C, who have both quietly built up well over a year’s entitlement. Second, the liability is still growing: with 4.2 full-time equivalents, the café accrues roughly $510 of leave cost every week (about $121 per full-timer once loading and super are included).

None of that shows in the bank balance. Most of it doesn’t need to, as long as the owner knows when it will turn into cash.

When does the liability turn into cash?

In an ordinary week, an employee on leave costs about the same as one at work: you were paying their wage anyway, plus the loading. The real cash events are the moments the leave arrives in a lump, or arrives while you’re also paying someone else.

1. A resignation. If full-timer C resigns, the café owes $8,400 plus $1,470 loading in the final pay, on top of their last wages, and usually just as it’s paying to recruit and train a replacement. That’s roughly two months of C’s base pay landing in one pay run.

2. A shutdown or a quiet season. If the café closes for two weeks over Christmas and New Year, it pays leave to everyone with a balance while it takes nothing at the till. For this team, two weeks of leave each (only 1.5 for part-timer E, who has no more banked) comes to around $11,400 in base and loading before super, paid during the slowest stretch of the year. If you’re planning a close-down, many awards require at least 28 days’ written notice before you can direct staff to take leave over it; Fair Work explains the award shutdown rules. For a shutdown starting just before Christmas, that means late November at the latest.

3. Covering leave in a busy period. If C takes four weeks in March and the café brings in a casual to cover, it pays both. The leave was always owed; the cover is the extra cost.

4. Selling the business. If employees transfer to a buyer and their service is recognised, the buyer inherits the balances and will expect a price adjustment. If they don’t transfer, you pay them out at settlement. Either way it comes out of your proceeds. Our due diligence guide shows how buyers read this line.

If you can see one of those moments coming and the buffer looks thin, it’s worth talking to us before it’s urgent. See what your business could qualify for, and enquiring involves no credit check.

Why don’t my accounts and my tax return agree on leave?

Because they’re answering different questions. Your accountant will usually put a provision for annual leave on the balance sheet and expense it in the profit and loss as it builds up. That gives a truer picture of what each month’s trading really cost. If you’ve read our guide to reading a profit and loss statement, this is one of those non-cash lines worth recognising.

The tax return works on a different clock. Under section 26-10 of the Income Tax Assessment Act 1997, leave is deductible in the year it’s actually paid to the employee, not the year it accrues. A growing provision doesn’t reduce this year’s tax; a big payout does reduce the year it lands in. When you’re estimating tax, that timing difference is worth a line in the conversation with your accountant.

How do you keep the liability under control?

You don’t want a zero balance. Staff who take proper breaks stay longer, and a resignation costs far more than a leave payout. What you want is a liability that’s visible, spread out and planned.

• Put it on the dashboard. Look at total leave liability and the top three balances once a quarter, next to debtors and creditors.
• Agree leave dates early. A shared calendar that’s filled in by October saves a lot of December arguments.
• Use the excess-leave rules if you need them. Under most awards, if an employee has more than eight weeks accrued (ten for some shiftworkers) and you can’t agree on dates, you can direct them to take some leave with written notice. The Fair Work rules on excess leave set out the notice periods and limits.
• Allow cashing out carefully. Where the award allows it, an employee can cash out some leave with a written agreement, as long as they keep at least four weeks. It reduces the liability, but it’s cash out today, so plan it.
• Budget the shutdown. If you close every year, the leave cost of the close-down belongs in your 13-week cash flow forecast from October. Our free cash flow forecaster makes the dip easy to see.
• Price it in. Leave is part of what an employee costs. If your quotes are built on hourly wages alone, they’re missing roughly four weeks’ pay plus loading per full-timer each year. The first-employee cost guide walks through the full on-cost.

What should you do with the number once you have it?

Treat it like any other bill with an uncertain due date: put a figure on it, decide which parts could land in the next six months, and make sure the business could pay those parts without wrecking the month.

For the café, that might mean setting aside a few thousand dollars ahead of the Christmas close-down, getting A and C to book leave in the quieter autumn months, and keeping an eye on whether either is likely to move on. That turns a $29,000 surprise into a series of planned, ordinary pay runs.

Keep the leave paid and the doors open

A team with healthy leave balances is usually a sign of a business people want to work for. The tricky part is that the bill tends to arrive at the worst time: in the quiet weeks after Christmas, just as a key person resigns, or when trade dips and the leave doesn’t.

That’s the gap we help owners with. If a shutdown, a payout or a staffing change is about to bring your leave liability forward, a working capital facility or line of credit can carry the payment so your buffer and your BAS money stay put. We look at trading businesses for unsecured and line-of-credit options typically from $5,000 to $500,000, and property-secured loans from $20,000 to $5,000,000, for business purposes.

The enquiry takes about a minute and involves no credit check. We don’t send your details to a pile of lenders, so your phone won’t light up with strangers. A real person reads your answers, works through your situation and calls you. Please fill in the form accurately, including turnover, team size and what the funding is for, so we can match you to the right option the first time.

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