Is superannuation paid on termination payments?
Whether you’ve resigned from your job or been made redundant, you may still be entitled to some money from your employer. So how much of that money (if any) could go towards your super fund?
While you were working, if eligible then your employer had to pay a percentage of your salary into your super account. The amount it was required to pay to you super was based on your ordinary time earnings (OTE), generally what you earned for your ordinary hours of work.
The Australian Taxation Office (ATO) says your OTE could still include payments such as for commissions, bonuses, allowances and annual leave.
So what about payments from your employer when you leave and your employment ends? Does your employer have to pay super on your employment termination payments (ETP)?
The answer depends on what the termination payment is for. An ATO spokesperson told Canstar that as general rule, the superannuation guarantee is only payable on an employee’s ordinary time earnings (OTE).
Let’s take a close look at what counts as an employee termination payment (ETP).
What is an employee termination payment?
An employee termination payment is a lump sum payment made to you when your employment ends. The employment could end for a number of reasons such as redundancy, dismissal, resignation, retirement or even death.
According to the ATO, an ETP can include:
- payment for unused sick leave or unused rostered days off
- payment in lieu of notice (the employer doesn’t work a notice period but the Fair Work Ombudsman says an employer must pay the employee the amount they would have earned during the notice period)
- a gratuity or ‘golden handshake’
- compensation for loss of job or wrongful dismissal
- genuine redundancy payment or early retirement scheme payment above the tax-free limit
- certain payment made after the death of an employee
The ATO says an ETP doesn’t include:
- a lump sum payment for unused annual leave or long service leave
- the tax-free part of a genuine redundancy payment or early retirement scheme payment
- superannuation benefits
- a foreign termination payment.
Is superannuation paid on employment termination payments?
Superannuation is generally not paid on most employment termination payments. An exception applies if your employer pays out a relevant notice period, as this becomes part of your ordinary time earnings.
The ATO spokesperson says it does consider amounts paid on termination in lieu of notice as ordinary time earnings and super is payable on these amounts. A termination payment made in lieu of notice is just the ordinary amount you would have earned had your employment continued until the end of the notice period.
Whether your employer will make a lump sum payment instead of giving notice will generally be stated in the relevant employment award or agreement, or in the termination clause of your employment contract.
It would be a good idea to check your paperwork, and check with your employer to see what you may be entitled to.
What termination payments don’t employers pay superannuation on?
There are a number of employment termination payments that don’t constitute towards your ordinary time earnings.
For example, the ATO spokesperson told Castar that commonwealth superannuation law specifically excludes amounts of unused sick leave, annual leave and long service leave from an employee’s ordinary time earnings.
The ATO also considers redundancy payments and payments for unfair dismissal are not ordinary time earnings.
Again, you would be wise to check your employment agreement or contract to see what payments may be due to you on leaving your employment.
You should also consider any tax implications from receiving any employment termination payments. It might be a good idea to seek some independent professional advice.
Compare Superannuation with Canstar
The table below displays some of the superannuation funds currently available on Canstar’s database for Australians aged 30 to 39 with a super balance of up to $55,000. The results shown are sorted by Star Rating (highest to lowest) and then by 5 year return (highest to lowest). Performance figures shown reflect net investment performance, i.e. net of investment tax, investment management fees and the applicable administration fees based on an account balance of $50,000. To learn more about performance information, click here. Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD. Use Canstar’s superannuation comparison selector to view a wider range of super funds. Canstar may earn a fee for referrals.
- Performance, fee and other information displayed in the table has been updated from time to time since the rating date and may not reflect the products as rated.
- The performance and fee information shown in the table is for the investment option used by Canstar in rating of the superannuation product.
- Performance information shown is for the historical periods up to 31/01/2024 and investment options noted in the table information.
- Performance figures shown reflect net investment performance, i.e. net of investment tax, investment management fees and the applicable administration fees based on an account balance of $50,000. To learn more about performance information, click here.
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Performance and Investment Allocation Differences
- Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology.
- Some providers use different age groups for their investment profiles which may result in you being offered or being eligible for a different product to what is displayed in the table. See here for more details.
- Australian Retirement Trust Super Savings’ allocation of funds for investors aged 55-99 differ from Canstar’s methodology – see details here.
- The Australian Retirement Trust Super Savings (formerly Sunsuper for Life) product may appear in the table multiple times. While you will not be offered any single investment option, this is to take into account the different combinations of investment options Australian Retirement Trust may apply to your account based on your age. For more detail in relation to the Australian Retirement Trust (formerly SunSuper for Life) product please refer to the PDS issued by Australian Retirement Trust for this product.
- Investment profiles applied initially may change over time in line with an investor’s age. See the provider’s Product Disclosure Statement and TMD and in particular applicable age groups for more information about how providers determine their investment profiles.
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This article was reviewed by our Deputy Editor, Canstar Amanda Horswill before it was updated, as part of our fact-checking process.
Michael is an award-winning journalist with more than three decades of experience. As a senior finance journalist at Canstar, Michael's written more than 100 articles covering superannuation, savings, wealth, life insurance and home loans. His work's been referenced by a number of other finance publications, including Yahoo Finance and The Motley Fool.
Michael's worked as a reporter and producer for the BBC and ABC, including for Australian Story. He's also worked as a feature writer for The Courier-Mail and as a science and technology editor and commissioning editor at The Conversation.
Michael's professional awards include a Queensland Media Award and a highly commended in the Walkleys. In 2021 he was part of a team that was a finalist in the Australian Museum Eureka Prize for Science Journalism. He holds a Bachelor of Science in mathematics and applied physics (Manchester Metropolitan University) and a Masters of Science in pure mathematics (Liverpool University).
You can connect with Michael on LinkedIn.
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