Is Superannuation Paid on Termination Payments?

Whether you’re resigning from your job or being made redundant, ending your employment is likely to be a big transition. During this period of time where you could be figuring out your finances, it can be useful to understand which types of termination payments will add to your superannuation.

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

If you’re comparing Superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.

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 you selected.

Image Source: lovelyday12 (Shutterstock )

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