Under the Super Guarantee scheme, employers generally must pay a minimum super contribution to employees who are over 18 and earn over $450 a month. Currently, as at January 2019, the super guarantee is 9.5% of an employee’s ordinary time earnings (OTE), that is, what an employee earns for their ordinary hours of work including any bonuses, allowances, annual leave and sick leave.
Therefore, whether or not super is payable on termination payments depends on what the payment is for and whether this is classified as OTE.
What is an employee termination payment?
An employee termination payment (ETP) is a lump sum payment made when a person’s employment is terminated. Termination could be for reasons including redundancy, dismissal, resignation, retirement or death. However, it’s important to note that just because a payment is considered an ETP, it doesn’t necessarily mean your employer will have to pay super on it.
According to the Australian Taxation Office (ATO), ETPs can include:
- Payments for unused sick leave and unused rostered days off
- Payments in lieu of notice (this is when an employer does not give an employee notice and instead pays the employee the amount they would have earned during the notice period)
- Compensation for unfair dismissal
- Genuine redundancy payments or early retirement scheme payments above the tax-free limit
- Non-genuine redundancy payments (for example, where an employee leaves voluntarily or is dismissed for disciplinary or inefficiency reasons)
The ATO says ETPs do not include:
- Lump sum payments for unused annual leave or long service leave
- The tax-free part of a genuine redundancy payment or early retirement scheme
- Salary, wages, allowances, bonuses and incentives owed to the employee for work already done
- Superannuation benefits
- Termination payments from overseas employment
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What termination payments don’t employers pay super on?
Many termination payments do not constitute an employee’s OTE and therefore do not require super contributions. According to the ATO, payments for unused annual leave, unused long service leave, unused sick leave and redundancy payments are not part of an employee’s OTE. Similarly, payments to compensate an employee for unfair dismissal are not OTE. Therefore, none of these termination payments would attract super contributions.
What termination payments do employers pay super on?
The ATO says employers must pay super contributions even where an employee receives a lump sum instead of working through their notice period. These payments are considered part of an employee’s OTE because they are equivalent to the ordinary salary or wages an employee would have earned had their employment continued until the end of the notice period.
Whether an employer may make a lump sum payment instead of giving an employee notice will generally be stated in the relevant award and agreement or in the termination clause of the employee’s employment contract.
Here’s a quick table to summarise a few different types of termination payments and whether employers typically must pay super on them:
| Termination payment | Superannuation payment? |
|---|---|
| Unused annual leave | No |
| Unused long service leave | No |
| Redundancy payments | No |
| Payment in lieu of notice | Yes |
Source: ATO
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