Is Super Payable On Termination Payments? ATO Rules For Employers

Ending an employment relationship is rarely just about “wrapping things up”. For most small businesses, termination is when payroll becomes high-stakes: you’re calculating final pay, paying out leave, possibly handling redundancy, and making sure your tax and reporting are correct.

One of the most common questions we see from employers is whether super is payable on termination payments under ATO rules. And the reason it’s so common is simple: not all “termination payments” are treated the same way for superannuation purposes.

Some amounts paid at termination do attract super because they’re still considered part of an employee’s ordinary time earnings. Other amounts, even though they’re paid in the final pay run, are specifically excluded under ATO guidance.

Below, we break it down in plain English so you can confidently work out when superannuation is (and isn’t) payable on termination payments, what to watch out for, and how to keep your business compliant.

Important: This article is general information only and isn’t tax, accounting or financial advice. Super and termination payments can be fact-specific, and ATO positions can change. For advice on your exact scenario, you should speak to your accountant/registered tax agent or check the ATO guidance.

What Counts As A “Termination Payment” In Practice?

When you process someone’s final pay, you may end up paying several different components at once. In everyday business language, employers might refer to all of these as “termination payments”, but legally and for ATO purposes, they can fall into different categories.

Common termination-related amounts include:

• Wages/salary up to the employee’s final day (including any ordinary hours worked in the last pay cycle)
• Accrued but unused annual leave paid out on termination
• Accrued long service leave paid out on termination (where applicable)
• Payment in lieu of notice (where you end employment immediately but pay notice instead of requiring them to work it)
• Redundancy payments (including genuine redundancy amounts, where relevant)
• Bonuses/commissions that become payable at or around termination
• Employment termination payments (ETPs), such as certain gratuities, ex-gratia amounts, or severance amounts that meet the ATO definition

If you’re building your termination checklist, it’s also worth making sure your final pay calculations are right overall (not just super). A good starting point is having a process for final pay that covers all the moving parts.

Is Super Payable On Termination Payments? The Core ATO Rule To Know

In most cases, the question of whether super is payable on termination payments comes down to one main concept: Super Guarantee (SG) is generally payable on ordinary time earnings (OTE).

That means you’re typically asking two questions for each termination component:

• Is this amount considered “ordinary time earnings”?
• Is it paid in respect of ordinary hours of work (or otherwise included in OTE)?

In practical terms:

• Super is usually payable on amounts that are essentially the employee’s normal earnings for ordinary hours (even if those earnings are paid in the final pay run).
• Super is usually not payable on amounts that are compensation for the termination itself, or are specifically excluded from OTE (even if they’re paid at the same time).

It’s also important to remember: being called a “termination payment” doesn’t automatically mean it’s exempt from super. The label on your payslip isn’t what matters most - the character of the payment does.

Superannuation On Termination Payments: Common Payment Types Explained

To help you apply the rule properly, here’s how common termination components are usually treated.

1. Ordinary Wages Up To The Termination Date

Super is generally payable on:

• ordinary hours worked up to the final day
• ordinary-time allowances (where they form part of OTE)
• commissions that are part of the employee’s ordinary remuneration (noting commissions are often treated as OTE, depending on how they’re earned and paid)

This part is usually straightforward: if it would have attracted SG during employment, it normally still attracts SG even though it’s being paid at the end.

2. Unused Annual Leave Paid Out On Termination

In many cases, super is not payable on unused annual leave that is paid out on termination, because it is generally not treated as OTE when paid on termination.

This is a classic area where employers get caught out because annual leave paid during employment (i.e., when someone takes leave) is treated differently to annual leave paid on termination.

Because the rules can depend on what exactly is being paid and why, it’s wise to approach leave payouts carefully - particularly if your business has different categories of employees, awards, or enterprise agreements in play. If you want a broader view of what you need to pay out, this can intersect with annual leave on resignation obligations as well.

3. Unused Long Service Leave Paid Out On Termination

Long service leave (LSL) is largely state/territory-based, and entitlement rules vary depending on where the employee is based and their length of service. From a super perspective, super is commonly not payable on long service leave paid out on termination (similar reasoning to leave payouts generally being excluded from OTE when paid on termination).

Because LSL can be complex, if you’re terminating a long-serving employee, it’s worth double-checking both:

• their LSL entitlement under the relevant state scheme, award or agreement; and
• whether any portion of what you’re paying could be characterised as ordinary earnings versus a termination-related payout.

4. Payment In Lieu Of Notice

Payment in lieu of notice is when the employee doesn’t work their notice period (for example, you end employment immediately), but you pay them the amount they would have earned during the notice period.

This is one of the most searched topics when employers are looking up ATO rules on super and termination payments, because it feels like “ordinary wages”. However, payment in lieu of notice is commonly treated as not attracting SG where it is paid because employment ended (rather than in respect of ordinary hours actually worked).

It’s also worth separating this from a different scenario: if the employee works out their notice period and you pay them their ordinary wages for that time, that pay is generally treated like ordinary wages and SG is usually payable.

Because notice issues often come up alongside super questions, it’s helpful to keep your approach consistent with your overall termination process. If this scenario comes up regularly, having a clear internal approach to payment in lieu of notice can reduce mistakes and disputes.

5. Redundancy Payments (Including Genuine Redundancy)

Where a role is genuinely no longer required and you’re making the employee redundant, you may owe redundancy pay (depending on eligibility and any award/enterprise agreement requirements).

Super is generally not payable on redundancy payments that are paid because the job is ending (as opposed to payment for ordinary hours worked).

Redundancy calculations can be technical, and employers often want to sanity-check the numbers early, especially where cashflow is tight. A redundancy calculator can help you estimate entitlements, but you should still verify the final position against the employee’s actual conditions and legal minimums.

6. Employment Termination Payments (ETPs) And Ex-Gratia Amounts

Some termination-related payments fall into the ATO category of an Employment Termination Payment (ETP). This often includes amounts paid because employment ends (and not because of ordinary hours worked), and may include certain severance or “golden handshake” style payments.

Super is generally not payable on ETPs, because they are not ordinary time earnings.

That said, correctly classifying a payment as an ETP matters for tax withholding and reporting, so if you’re making a termination payment that goes beyond “standard final pay plus leave”, it’s worth getting advice to ensure you’ve categorised it correctly.

7. Bonuses And Commissions Paid At Termination

Bonuses and commissions can be tricky, because their super treatment often depends on what the payment is actually for.

As a general guide:

• If the bonus/commission is part of the employee’s ordinary remuneration (for example, commissions earned through their usual role and performance), it is often treated as OTE (meaning super may be payable) even if it’s calculated or paid at termination.
• If it is paid because employment ended (for example, a discretionary “farewell payment” or a settlement-style amount), it’s less likely to be OTE (meaning super is less likely to be payable).

Because commissions and bonuses can also be structured in different ways (including being tied to results, hours, or specific events), it’s important not to assume the super outcome without checking how the entitlement is defined in the contract, policy, award or plan.

This is a common area for disputes, so it helps to have your employee remuneration set out clearly in writing from day one, ideally in a properly drafted Employment Contract.

How To Pay Super Correctly When Processing A Termination

Once you’ve worked out which components attract super, the next challenge is making sure you pay it correctly and on time.

Step 1: Break The Final Pay Into Components (Don’t Lump It Together)

Avoid running the entire termination amount as a single “gross” payment. You should separate out:

• ordinary wages up to the final day
• overtime (if any)
• leave paid out (annual leave, long service leave)
• notice in lieu (if any)
• redundancy / severance components (if any)
• bonuses/commissions (if any)

This makes it much easier to determine which parts attract SG and which parts don’t, and it also makes your recordkeeping cleaner if anything is queried later.

Step 2: Check The Relevant Award, Agreement Or Contract

While ATO rules set the foundation, your employment instruments (like modern awards, enterprise agreements, and the employee’s contract) affect:

• what the employee is entitled to be paid on termination
• how certain items are calculated (for example, leave loading)
• how notice and redundancy obligations apply

If you’re unsure what applies, it’s safer to confirm early than “fix it later”. Underpayment issues can be expensive and time-consuming, especially if the employee disputes the final pay.

Step 3: Pay Super By The Due Date (Even If Employment Has Ended)

Super obligations don’t disappear just because the employee has left. You still need to pay SG contributions for any amounts that attract SG by the relevant quarterly due date (unless you’re making contributions more frequently).

Many payroll issues happen when a business pays the final wages immediately (which is good), but forgets that the corresponding SG for OTE needs to be paid to the fund by the deadline.

Step 4: Keep Clear Records

If there’s ever a query (by the employee, accountant, or regulator), your best protection is being able to show:

• how you calculated each termination component
• which components you treated as OTE (and why)
• what SG you paid, to which fund, and when

Good recordkeeping is especially important where the termination is high-risk (for example, a redundancy, a dispute-related exit, or where commissions/bonuses are involved).

Common Super Mistakes Employers Make At Termination (And How To Avoid Them)

Here are the issues that most often create headaches for small businesses.

Mixing Up “Paid On Termination” With “Termination Payment”

Just because something is paid in the final pay run doesn’t automatically mean it is (or isn’t) subject to super. You need to characterise the payment properly.

Automatically Paying Super On Everything (Or Paying Super On Nothing)

Both approaches can cause problems:

• Overpaying super creates payroll cost blowouts and can be difficult to reverse.
• Underpaying super can trigger compliance issues, employee complaints, and penalties.

A component-by-component approach is usually the safest option.

Getting Notice And Termination Terms Wrong

Notice rules can vary depending on minimum legal requirements and what the contract says. If the contract is unclear (or you don’t have one), you can end up paying the wrong amounts, and that can snowball into super and tax reporting issues too.

This is one of the reasons we often recommend getting key employment terms documented properly upfront, including termination clauses and notice provisions.

Not Treating Redundancy As Its Own “Project”

If you’re making someone redundant, there are usually extra steps beyond a “standard termination”, including consultation obligations and verifying redundancy entitlements.

If you’re unsure whether what you’re planning is a genuine redundancy versus an ordinary termination, it’s worth getting advice early - that classification can affect what you pay and how you report it.

Key Takeaways

• Whether super is payable on termination payments under ATO rules usually turns on whether the amount is ordinary time earnings (OTE).
• Super is generally payable on ordinary wages up to the termination date, even when paid in the final pay run.
• Super is generally not payable on many termination-related amounts like unused leave paid out on termination, payment in lieu of notice (in many cases), redundancy pay, and many ETPs - but you should assess each item carefully.
• Bonuses and commissions can be complex: super treatment often depends on what the payment is for and how the entitlement is structured, not just when it’s paid.
• To stay compliant, separate termination amounts into clear components, verify entitlements under contracts/awards, pay SG by the due date, and keep strong payroll records.

If you’d like help reviewing your termination process, employment contracts, or a specific final pay scenario, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.