Annual leave and leave loading are a staple of Australian employment law — and a persistent source of bookkeeping errors. Whether it's failing to accrue correctly, misunderstanding when loading is payable, or not recognising the superannuation obligations on leave payments, the number of ways this area can go wrong is disproportionate to how straightforward it should be.
This guide covers the key mechanics: what leave loading is, how to accrue annual leave correctly, and how to book leave payments when employees take time off or exit.
The Basics: Annual Leave Under the Fair Work Act
Most employees covered by the national employment relations system are entitled to four weeks of paid annual leave per year under the National Employment Standards (NES). Shift workers entitled to five weeks are an exception. Casual employees are not entitled to annual leave.
Annual leave accrues continuously, at the rate of 1/26th of ordinary hours per fortnight (for a standard 38-hour week, this is approximately 2.923 hours per week). It does not lapse at a particular date — it accumulates until taken or paid out on termination.
The obligation to accrue is immediate from the first day of employment.
What Is Leave Loading?
Under the Fair Work Act and modern awards for the 2025–26 financial year, leave loading is an additional payment of 17.5% on top of the base rate of pay when annual leave is taken. It was originally introduced under awards to compensate employees for the loss of overtime earnings during leave — the reasoning being that many employees earned more than their base rate when working, so leave pay was effectively less than their normal take-home pay.
Whether leave loading applies depends on the employee's award, enterprise agreement, or contract. Not all employees are entitled to it. The Modern Awards that contain leave loading clauses should be checked against each employee's coverage.
Where leave loading applies, the payment is:
- 17.5% of the ordinary time rate (not overtime or allowances)
- Payable when the employee takes annual leave
- Also payable on the leave loading component of termination payments in most cases
Accruing Annual Leave in the Books
For businesses using accrual accounting (which includes most companies subject to audit or that prepare GPFS), annual leave must be recognised as a liability on the balance sheet as it accrues.
The liability represents the present obligation to pay employees for their accrued but untaken leave. For most small businesses using AASB 101 (or the simplified reduced disclosure requirements), the annual leave provision is calculated as:
Hours accrued × current pay rate = provision
Where award-based leave loading applies, the provision should include the 17.5% loading component as well.
Accounting entries — ongoing accrual (monthly):
- Dr Annual Leave Expense (P&L)
- Cr Annual Leave Provision (balance sheet — current liability)
When leave is taken:
- Dr Annual Leave Provision
- Cr Wages Payable / Bank (the actual payment, including loading if applicable)
The provision is remeasured each period as the pay rate changes and as leave is taken or paid out.
Superannuation on Annual Leave
Superannuation guarantee is payable on ordinary time earnings (OTE), and annual leave pay — including leave loading — is treated as OTE. This means superannuation is payable at 11.5% (for 2025–26) on the total annual leave payment including the 17.5% loading.
This catches some payroll operators who exclude leave loading from the super calculation. The ATO's Superannuation Guarantee Ruling (SGR 2009/2) confirms that leave loading is OTE where it is not clearly identifiable as a substitute for overtime earnings — which is the case for most award and enterprise agreement leave loading clauses.
Termination payments require more care. Annual leave paid on termination is OTE and attracts super. Long service leave paid on termination is generally not OTE. Redundancy payments are not OTE. Bookkeepers should review each component of a termination payout separately.
Cash Versus Accrual: The Small Business Reality
Many small businesses using cash accounting (typically those under $10M turnover who have elected the ATO's simplified accounting method) do not formally recognise leave provisions. They record annual leave expense when it is actually paid.
This is an acceptable approach for tax purposes (the deduction is claimed when the leave is paid, not when it accrues). But it has a management accounting blind spot: the business doesn't see the growing leave liability on its books, and a cash-basis P&L will understate the true cost of employing staff.
For client advisory purposes, it's worth flagging that a business with employees who have large accrued leave balances has a deferred cash liability. If three employees each have 40 hours of accrued leave, that's 120 hours × their pay rate that will need to be paid at some point — either when they take leave or when they leave.
High Leave Balances — a Risk Flag
Employees with excessive accrued leave balances represent both a financial risk (large future cash outflows) and an operational risk (staff who haven't taken leave are at higher burnout and attrition risk).
Under most Modern Awards, employers are permitted to direct employees to take leave where the balance exceeds a threshold (typically 8 weeks). This is an option worth discussing with clients who have employees with very high balances.
From a bookkeeping perspective, run a leave balance report (from the payroll system) at least quarterly and include it in the management accounts package. A growing aggregate leave liability that isn't visible to management is a problem.
Handling Leave on Termination
When an employee leaves, unused annual leave must be paid out. The payment includes:
- Annual leave balance (hours accrued) × base rate of pay
- Leave loading on the annual leave payment (where the employee's award or contract includes loading)
- Pro-rata leave loading in some awards and agreements
The calculation must use the employee's rate at the time of termination, not at the time the leave accrued.
Payroll tax applies to termination leave payments in most states. Tax withholding on termination leave payments is at the employee's marginal rate (no concessional treatment for annual leave, unlike long service leave).
Accounting entry on termination:
- Dr Annual Leave Provision (balance accrued to date)
- Dr Annual Leave Expense (if payout exceeds accrued provision — e.g., final period not yet accrued)
- Cr Wages Payable / Bank
Practical Tips
- Review leave balances monthly and flag employees with more than 8 weeks accrued
- Include leave loading in the accrual where the employee's award requires it — not doing so understates the liability
- Check super calculations on leave loading — it's OTE and super applies
- Reconcile the leave provision to the payroll system at year-end as part of the close process
- Don't treat long service leave and annual leave identically — they have different tax withholding rules on termination and different superannuation treatment
Annual leave accruals are straightforward in principle but produce real errors in practice. A monthly review of the provision balance against the payroll system is the best control.