Termination payments and superannuation

Public news

A very common query that our Workplace Relations team continues to receive from MTA Members is whether there is a requirement to pay employer superannuation contributions (currently at 9.5%) on payments at termination.

When an employee leaves a business, either by a resignation or a termination by the employer (including redundancy), there are a few termination payments that need to be addressed in addition to the employee’s normal wages. These payments may include:

  • Outstanding Annual Leave (including pro-rata annual leave)
  • Redundancy payments – in the case of businesses who have 15 or more employees
  • Notice period payments – when notice is worked or payments are paid in lieu
  • Outstanding Long Service Leave (LSL) – (including pro-rata LSL) - where applicable

The requirement to pay superannuation payments in the above instances is governed by the Fair Work Act and the Rulings of the Australian Taxation Office (ATO). The obligation to make superannuation payments is specifically governed by whether payments are regarded as Ordinary Time Earnings” (OTE’s).

Superannuation payments on unused annual leave, LSL and on redundancy payments:

An ATO Ruling negates the need to make superannuation payments on accrued unused annual leave and LSL payments on termination as they are not regarded as OTE’s. Similarly, the ruling also indicates that redundancy or severance payments are not considered as OTE’s and therefore do not attract superannuation payments.

Payments during notice periods of termination or payments made in lieu of notice:

Both the ATO Tax Rulings and the Fair Work Act have application in relation to notice periods or payments made in lieu, for example, where an employer chooses to pay out the relevant notice period and the employee is not required to work out the notice.

The ATO Rulings categorises such payments as OTE’s and consequently they will attract employer superannuation contributions. The Fair Work Act also states that where an employer elects to pay an employee in lieu of notice of termination, it must include payments the employee would have been entitled to have if the employee worked out their notice, including superannuation contributions.

Wages paid during the notice period when an employee is required to work out their notice (excluding overtime payments) is classified as OTE’s.

If you need further clarification on the above, you can contact the MTA’s Workplace Relations team by clicking here or by calling 8291 2000.