Is Superannuation Payable on Termination Payments?

Superannuation is Australia’s retirement savings system, designed to provide individuals with financial support in retirement. Employers are generally required to contribute a percentage of an employee’s earnings into a superannuation fund. This article clarifies which payments made to an employee when their employment ends are subject to these superannuation contributions, helping both employers and employees understand their obligations and entitlements.

Understanding Termination Payments

When an employee’s tenure with an organization concludes, they may receive several types of payments. Accrued but untaken annual leave represents the value of unused holiday entitlements that are paid out. Similarly, accrued but untaken long service leave compensates employees for extended periods of service that they have not yet utilized as time off.

Payment in lieu of notice occurs when an employer terminates employment immediately, providing a lump sum payment equivalent to the wages the employee would have earned during their notice period instead of requiring them to work. Redundancy payments are provided when an employee’s position is no longer required. Genuine redundancy meets specific criteria set by the Australian Taxation Office (ATO) and Fair Work Act. Ex-gratia payments are discretionary amounts given by an employer, often as a gesture of goodwill, that are not legally required.

Unpaid wages or salary covers any regular earnings owed for work already performed up to the termination date. Bonuses or commissions are additional payments that may be tied to performance targets or sales achievements, which could be due at the time of employment cessation. Understanding the nature of each payment is important for determining superannuation obligations.

Superannuation Guarantee on Termination Payments

Employers generally have an obligation to pay Superannuation Guarantee (SG) contributions on an employee’s ordinary time earnings (OTE). Unpaid wages or salary for the period worked up to the termination date are always considered OTE, meaning superannuation contributions are mandatory on these amounts. This ensures that regular earnings are consistently subject to superannuation.

Payments in lieu of notice are also typically subject to SG contributions. If an employee receives a payment instead of working their notice period, this amount is generally treated as OTE because it represents earnings the employee would have received had they continued working. The ATO views such payments as replacing ordinary hours of work, thus attracting superannuation.

Certain bonuses and commissions earned by an employee prior to termination are considered OTE, and therefore attract superannuation, if they are directly related to the employee’s ordinary hours of work. For instance, a performance bonus tied to regular duties would be superable. Annual leave and long service leave paid out during employment generally attract superannuation.

Payments Exempt from Superannuation Guarantee

Many termination payments are not subject to Superannuation Guarantee contributions because they do not fall under the definition of Ordinary Time Earnings (OTE). Genuine redundancy payments are specifically exempt from SG contributions. For a redundancy to be considered genuine, the employee’s job must no longer be required, their employment is terminated for this reason, and there is no agreement for re-hiring.

Lump sum payments for unused annual leave or annual leave loading paid out on termination are not considered OTE and therefore do not attract superannuation. The reason for this exemption is that these payments relate to a future period when the employee is no longer employed, rather than representing earnings for ordinary hours worked. Similarly, payments for unused long service leave paid out on termination are also generally exempt from SG contributions. These are typically seen as compensation for past entitlements rather than current earnings.

Ex-gratia payments are usually not superable, especially if they are discretionary and not directly related to the employee’s ordinary hours of work or performance. The ATO’s definition of OTE specifically excludes lump sum payments made on termination for unused sick leave, annual leave, and long service leave. This distinction is important for employers to correctly calculate their superannuation obligations.

Calculating Superannuation on Termination Payments

Calculating Superannuation Guarantee contributions on superable termination payments involves applying the current SG rate to the employee’s Ordinary Time Earnings (OTE). From 1 July 2025 onwards, the Superannuation Guarantee rate is 12%. This rate is applied to the gross amount of the superable payment.

For example, if an employee receives a payment in lieu of notice totaling $5,000, and this payment is considered OTE, the employer would calculate the superannuation contribution by multiplying $5,000 by 12%. This results in a $600 superannuation contribution that must be paid into the employee’s nominated super fund.

Employers must ensure these contributions are paid by quarterly deadlines set by the ATO. The maximum super contribution base for SG purposes is $62,500 per quarter for the 2025-26 financial year, meaning super is not required on earnings above this threshold in a quarter.