Do You Pay Superannuation on Annual Leave?

Superannuation is a system in Australia designed to help individuals save for retirement, with employers making compulsory contributions on behalf of their employees. Alongside this, annual leave provides employees with paid time off from work. Understanding how these two aspects of employment interact is important for both employers and employees to ensure compliance and proper financial planning.

Understanding Superannuation Guarantee Obligations

The Superannuation Guarantee (SG) system in Australia mandates that employers contribute to their eligible employees’ retirement savings. This scheme aims to build a retirement nest egg for workers, reducing reliance on public pensions. Employers must pay superannuation for employees aged 18 and over, and for those under 18 who work more than 30 hours per week.

These contributions are calculated based on an employee’s “ordinary time earnings” (OTE), which represents the earnings from their regular hours of work. The current minimum SG contribution rate for the 2024/2025 financial year is 11.5% of an employee’s OTE, with this rate scheduled to increase to 12% from July 1, 2025.

Ordinary time earnings include payments for normal salary and wages, commissions, allowances, and paid leave. Payments for overtime, however, are excluded from OTE, provided the employee’s ordinary hours are clearly identified. Employers are not required to pay SG on earnings above a certain maximum contribution base, which for the 2024/2025 financial year is $65,070 per quarter.

Superannuation on Annual Leave Taken During Employment

When an employee takes annual leave during their period of employment, the payments received for this leave are considered part of their ordinary time earnings (OTE). This means that annual leave pay is subject to superannuation guarantee contributions, just like regular wages. The Australian Taxation Office (ATO) views annual leave as part of an employee’s ordinary hours, requiring superannuation contributions on these payments.

This treatment ensures that an employee’s superannuation contributions continue to accrue even when they are taking approved time off. The superannuation calculation for annual leave taken during employment follows the same rules as for an employee’s regular pay. Therefore, when an employee is on annual leave, their employer must continue to make the mandated superannuation contributions based on the OTE received during that leave period.

Similarly, if an employee chooses to cash out a portion of their accrued annual leave while still employed, this cashed-out amount is also considered OTE. Consequently, superannuation contributions are payable on such payments.

Superannuation on Unused Annual Leave Paid Out on Termination

The superannuation treatment of annual leave changes significantly when an employee’s employment ends. Unused annual leave paid out as a lump sum upon termination is not considered ordinary time earnings (OTE). Superannuation guarantee contributions are not required on these payouts.

This rule applies regardless of the reason for termination, whether it is due to resignation, redundancy, or dismissal. The Australian Taxation Office (ATO) explicitly excludes unused annual leave payments made on termination from the definition of OTE. This is because such payments are viewed as a settlement for past entitlements rather than earnings for ordinary hours worked in the current period.

While this is the general rule, it is worth noting that some specific industrial instruments, such as enterprise bargaining agreements (EBAs), may have different provisions. Employers and employees should consult their specific employment contracts or agreements to confirm the treatment of unused annual leave payouts on termination.

Common Payments and Superannuation Treatment

Beyond annual leave, other common payments have specific superannuation treatments. Leave loading, often an additional payment of 17.5% on annual leave, is considered Ordinary Time Earnings (OTE) and thus attracts superannuation.

Bonuses and commissions are included as OTE and are subject to superannuation contributions. This applies to performance bonuses, retention bonuses, and sales commissions if they relate to work performed during ordinary hours.

Payments made in lieu of notice, where an employee is paid out instead of working their notice period, are considered OTE. This means that superannuation is payable on these amounts, as they replace earnings the employee would have received for ordinary hours had they worked the notice period. Conversely, genuine redundancy payments are not subject to superannuation, as they are considered compensation for job loss rather than earnings for work performed.