While you are working, your employer must pay a percentage of your salary into your super account. Currently, as at January 2021, this is 9.5% of your ordinary time earnings (OTE). OTE is generally what you earn for your ordinary hours of work and it includes things like commissions, bonuses, allowances and annual leave.
So what about when your employment ends? Does your employer have to pay super on termination payments? The answer depends on what the termination payment is for. If the payment is classified as OTE, then super will be payable. Firstly, let’s take a look at what an employee termination payment actually is.
What is an employee termination payment?
Employee termination payments will attract super contributions in limited circumstances. An employee termination payment (or ETP) is a lump sum payment made when a person’s employment ends. Termination could be for reasons such as redundancy, dismissal, resignation, retirement or death.
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 of termination and instead pays 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 payments or early retirement scheme payments above the tax-free limit
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 or leave already taken
- Superannuation benefits
- Termination payments from overseas employment
What termination payments do employers pay super on?
Super contributions are payable on an employee’s OTE. The ATO says employers must pay super contributions where an employee receives a termination payment in lieu of notice. 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.
What termination payments don’t employers pay super on?
Many termination payments do not constitute an employee’s OTE and therefore do not qualify to receive super contributions. According to the ATO, lump sum termination payments for unused annual leave, unused long service leave and unused sick leave are not part of an employee’s OTE. Similarly, termination payments to compensate an employee for unfair dismissal and redundancy payments are not OTE. Therefore, none of these termination payments would attract super contributions.
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, long service leave or sick leave||No|
|Unfair dismissal payments||No|
|Payments in lieu of notice||Yes|
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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 that matches the age group specified above.
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