Do You Pay Superannuation On Annual Leave?

When you’re paying staff in Australia, it’s normal to wonder what exactly attracts superannuation and what doesn’t. Annual leave, annual leave loading, long service leave and final payouts can all be treated differently for super purposes – and getting it wrong can be costly.

Here’s the short answer up front: super is generally payable on paid leave taken during employment, including annual leave. However, lump sum payouts of unused leave when employment ends are usually not superable. The details matter, so let’s unpack the rules in plain English so you can stay compliant and keep payroll running smoothly.

In this guide, we explain when super must be paid on annual leave and annual leave loading, what happens on termination or cash-outs, how long service leave is treated, and the practical steps to keep your records and contracts in order.

Superannuation (SG) In Australia: The Basics

Superannuation (or “super”) is a compulsory employer contribution under the Superannuation Guarantee (SG). From 1 July 2025, the SG rate is 12% of an employee’s eligible earnings. Employers must contribute at least this percentage into a complying super fund by each quarterly due date.

The key concept you’ll hear is Ordinary Time Earnings (OTE). Broadly, OTE covers earnings for ordinary hours of work – and that’s what the SG applies to. Many forms of paid leave sit within OTE, which is why super commonly applies when staff take time off and are paid for it.

Why this matters: if you underpay super (even unintentionally), you can face the Superannuation Guarantee Charge, interest and admin penalties, and the time cost of fixing past periods. It’s far better to set up your payroll rules correctly now.

Quick definitions you’ll see in this article

• Annual leave: Paid time off accrued by permanent employees under the National Employment Standards (NES) or an industrial instrument.
• Annual leave loading: An extra payment (often 17.5%) some employees receive when taking annual leave.
• Long service leave: Paid leave for long-term service, with rules set by state/territory laws or industrial instruments.
• Termination payouts: Lump sums paid on ending employment – for example, unused annual leave or long service leave.

Important note about casuals: casual employees generally do not accrue paid annual leave under the NES. They may still become entitled to long service leave in some jurisdictions based on continuous service rules. The super rules therefore differ depending on whether the employee actually receives paid leave.

Tax note: super touches both employment and tax law. For edge cases, check with your accountant as well as seeking legal guidance, so your payroll calculations and tax reporting are aligned.

Do You Pay Super On Annual Leave Taken?

Yes. When a permanent employee takes annual leave during employment, the payment for that leave generally counts as OTE. That means you must pay super at the SG rate on the leave period, just as if the employee were working their ordinary hours.

Examples

• Full-time employee takes two weeks of annual leave and is paid their ordinary base rate. Super applies to those two weeks’ leave payments.
• Part-time employee takes one day of annual leave for their usual shift. Super applies to the paid leave for that day.

What about casuals? Casual employees typically don’t have paid annual leave, so there’s no annual leave payment on which to calculate super. They still receive super on their ordinary hours worked if they’re otherwise eligible for SG.

Annual leave accrued vs taken

Super is assessed on payments made, not on accruals. So the key question is whether the leave is being taken and paid (super usually applies), or being paid out as a lump sum on termination (see the termination section below).

Is Super Paid On Annual Leave Loading?

Annual leave loading is the extra payment that some employees receive when they take annual leave – often 17.5%, and commonly found in modern awards or enterprise agreements. The big question is whether leave loading is part of OTE.

In practice, annual leave loading is generally treated as OTE and attracts super when it’s paid alongside annual leave. The main caveat is if the loading is clearly and specifically paid to compensate for lost overtime (and the industrial instrument actually says so). Without that explicit link to overtime, the default position is that super applies to the loading.

If you’re unsure what your instrument says, it’s safer to assume super is payable on both the basic annual leave pay and the leave loading. You can also review your obligations around Annual Leave Loading and how it interacts with other entitlements in your documents.

Scenario

Alex, a full-time employee covered by an award that provides 17.5% loading, takes one week of annual leave. Alex’s weekly wage plus the 17.5% loading are treated as OTE for that period, so super is payable on the whole leave payment.

Termination, Cashing Out And Final Pay: When Super Is Not Payable

Super treatment changes once employment ends or when leave is paid out as a lump sum (rather than taken as time off).

Unused annual leave paid out on termination

When an employee resigns, is dismissed or is made redundant, any unused annual leave usually must be paid out. That lump sum for unused annual leave is generally not OTE, so super is not required on that termination payout (unless an instrument specifically says otherwise, which is uncommon).

If you’re handling end-of-employment calculations, it’s worth reviewing your obligations for calculating final pay and checking what needs to be included in the last payslip and how each component is treated for super.

Annual leave loading on termination

If you pay annual leave loading as part of a lump sum for unused annual leave at termination, that loading typically follows the same treatment as the unused annual leave payout itself – i.e. it generally does not attract super.

Cashing out annual leave during employment

Some awards, enterprise agreements or contracts allow employees to cash out annual leave during employment (subject to strict rules). Because this happens while the employee is still employed, you need to check the specific instrument and treat the cash-out consistently with how OTE is defined. If the cash-out is treated as a payment for ordinary time, super may be payable. If your team can cash out leave, ensure your policy and contracts are consistent and that your payroll settings are configured correctly before processing any cash-outs. If you’re also working through resignation logistics that involve leave balances, it can be helpful to cross-check your obligations around annual leave on resignation.

Notice, redundancy and other termination payments

• Payment in lieu of notice: Generally not OTE and super is not required. See how it interacts with SG in this guide to payment in lieu of notice and superannuation.
• Redundancy/severance payments: Generally not OTE and do not attract super.
• Accrued but unused leave (annual or long service leave) paid out on termination: Generally not OTE and super is not required.

Because termination pays can bundle several line items, it’s smart to map out each component against your payroll system’s super rules and confirm the treatment with your accountant – particularly for large or unusual payouts.

Long Service Leave And Other Scenarios

Long service leave (LSL) rules vary by state and territory and may be affected by awards or enterprise agreements. However, a common approach applies for super purposes.

Long service leave taken during employment

When an employee takes LSL as paid leave during employment, those payments are commonly treated as OTE. In other words, super is generally payable on paid LSL taken as time off.

Long service leave paid out on termination

Unused LSL paid as a lump sum after employment ends is generally not OTE, so super is not required on that termination payout.

Sick leave, carers leave and public holidays

• Sick and carer’s leave: When taken as paid leave, these payments are typically treated like ordinary time and super applies.
• Public holidays: Paid public holidays as part of an employee’s ordinary earnings generally attract super.
• Unpaid leave: No wages are paid, so there’s no OTE and no super contribution for that period.

Bonuses and allowances

Whether a bonus or allowance attracts super depends on the nature of the payment and whether it falls within OTE. As a starting point, remember that OTE focuses on ordinary hours of work; if a payment is closely linked to those ordinary hours, it may be superable, whereas some discretionary or expense-related payments are not. If you pay bonuses, align your approach with your policies and payroll configuration and consider a review alongside your accountant and HR team.

Practical Steps, Documents And Payroll Compliance

Putting clear rules in writing and configuring your payroll software correctly will save you time and reduce risk of underpayment. Here’s how to set yourself up well.

1) Lock in clear contracts and policies

• Employment Contract: Spell out leave entitlements, any annual leave loading, cash-out options (if permitted), and how entitlements are calculated on different work patterns.
• Staff Handbook and workplace policies: Set expectations for leave requests, record-keeping, and payroll cut-offs. Clear policies help the team and your payroll officer stay consistent.

Well-drafted documents reduce ambiguity, which makes super decisions on different pay types much easier.

2) Configure payroll correctly (and review it)

• Create pay items for annual leave, annual leave loading, LSL taken, and each termination component (e.g. unused annual leave, unused LSL, payment in lieu of notice).
• Set each pay item’s SG treatment in your payroll system to match the law and your instruments.
• Run a periodic review (e.g. quarterly) to ensure super has been calculated correctly before lodgement deadlines.

As a cross-check, compare your system’s final pay process against your obligations for final pay to make sure nothing has been misclassified for super.

3) Use examples to train your team

Payroll accuracy improves when the whole team understands the rules. Build simple internal examples (annual leave taken vs leave paid on termination, cashing out during employment vs after termination) and store them with your policies so managers and payroll officers can make consistent decisions.

4) Keep thorough records

• Leave accruals by type (annual, personal/carer’s, LSL).
• Leave taken (dates, hours and rates, with or without loading).
• Termination breakdowns clearly separating each component and its super treatment.

Good records protect you in audits and make it easier to respond quickly to employee queries.

5) Get tailored advice for edge cases

Awards and enterprise agreements can have nuances (especially around leave loading and cash-outs). If you’re unsure how your instrument characterises a payment, it’s worth getting tailored advice early. This is particularly important when you’re dealing with unusual work patterns, historical errors or complex terminations.

If your business needs help reviewing contracts or clarifying how OTE applies to a specific scenario, our team can talk through the practical steps and update your documents and payroll settings so they align with the law and your instruments.

Key Takeaways

• Super is generally payable on paid annual leave taken during employment because those payments are part of ordinary time earnings.
• Annual leave loading commonly attracts super when paid with leave, unless your instrument expressly states the loading is specifically for lost overtime.
• Lump sum payouts of unused annual leave and unused long service leave on termination are generally not OTE and do not attract super.
• Long service leave taken during employment is commonly superable; long service leave paid out on termination generally is not.
• Payment in lieu of notice and redundancy/severance payments are generally not OTE and don’t require super.
• Get your contracts and payroll settings aligned, and keep clear records so your super calculations remain consistent and compliant.
• For complex cases or unusual instruments, confirm treatment with your accountant and consider a legal review to avoid underpayments.

If you’d like advice on superannuation obligations, leave entitlements or updating your employment documents, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.