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.

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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.