Is Super Payable On Termination Payments?

Ending an employment relationship is one of those moments where payroll and legal obligations collide.

You might be managing a resignation, a dismissal, a redundancy, or a contract coming to an end. Either way, you’ll usually need to calculate a “final pay” that can include wages, unused leave, notice (or payment in lieu), bonuses and sometimes redundancy pay.

A common (and very practical) question we hear from small business owners is whether super is payable on termination payments.

The short answer is: sometimes yes, sometimes no - it depends on what the termination payment is made up of. The rules aren’t identical for each component of a final pay, and getting it wrong can create backpay liabilities and compliance headaches.

Below, we’ll walk you through how superannuation generally applies to termination payments in Australia, which components commonly attract super, which commonly don’t, and how to set up your offboarding process so you can pay people correctly and move on with confidence.

What Counts As A “Termination Payment” In Australia?

When people ask whether superannuation is payable on termination payments, they’re often referring to the entire final payment you make to an employee when their employment ends.

In practice, a final pay can include a mix of items, such as:

• Final wages (ordinary hours worked up to the termination date)
• Overtime and certain allowances (if owed)
• Payment in lieu of notice (if you end employment immediately)
• Unused annual leave (and sometimes leave loading)
• Unused long service leave (depending on eligibility and the relevant State/Territory rules)
• Redundancy pay (if applicable)
• Bonuses, commissions, incentives (if contractually owed or payable under a policy/plan)
• Other “one-off” amounts (for example, an ex gratia amount as part of a settlement)

Some of these items are treated like ordinary earnings, and some are treated differently (including for tax and super purposes). That’s why the question of whether superannuation is payable on termination payments can’t be answered with a single rule that fits all cases.

If you’re also working out what needs to be included in a final pay, it helps to have a consistent checklist and calculation method (particularly if you have different employee types and different Awards). In many cases, the safest approach is to calculate the final pay component-by-component rather than trying to treat the final pay as one lump sum.

If you want a practical breakdown of what typically goes into the final payout, final pay is a useful starting point.

Is Super Payable On Termination Payments Under Australian Law?

In Australia, employer super contributions under the Superannuation Guarantee (SG) regime are generally tied to what the law treats as an employee’s ordinary time earnings (OTE).

So, the real question behind whether superannuation is payable on termination payments is usually:

• Which parts of the final pay are OTE (or otherwise treated as superable earnings)?
• Which parts are not?

As a general rule (and keeping things practical for small business payroll):

• Super is commonly payable on ordinary wages up to the last day of employment (because that’s ordinary time earnings).
• Super is generally not payable on unused leave paid out on termination (for example, unused annual leave), because termination leave payments are typically not treated as OTE for SG purposes.
• Payment in lieu of notice is generally not OTE for SG purposes and so super is generally not payable on it - but you should still check the nature of the payment and how it’s recorded/characterised in payroll (because misclassification can cause errors).
• Genuine redundancy payments are generally not OTE and commonly do not attract super (but you still need to check what parts of a payout are wages versus redundancy components).

Because the dividing line is so often “OTE vs not OTE”, it’s worth treating OTE as the central concept when you’re deciding whether super is payable.

If you’re dealing with a termination that involves notice being paid out rather than worked, this is an area where employers commonly make mistakes. Having a clear process for payment in lieu of notice can help you avoid inconsistent calculations from one termination to the next.

Important: this article is general information only and isn’t tax advice. Superannuation treatment can turn on the precise facts and how amounts are classified. If you’re unsure, consider getting advice (including from your accountant or payroll provider) and checking ATO guidance on OTE and SG.

Which Termination Pay Components Usually Attract Super (And Which Usually Don’t)?

To work out whether super is payable on termination pay in a real-world payroll situation, break the final pay into components and assess each one.

1. Final Ordinary Wages Up To The Termination Date

Super is usually payable on ordinary hours actually worked up to the employee’s last day, because this is the classic example of ordinary time earnings.

This includes (for example):

• ordinary hourly wages or salary (pro-rated to the final day)
• ordinary shift hours that are not overtime

If your employee works through their notice period, their ordinary wages during that period will usually remain superable in the normal way.

2. Overtime

Overtime is often not treated as OTE for super purposes (and many payroll systems treat it differently).

However, overtime and penalty structures can vary depending on how your employees are classified and what instrument applies (Award, enterprise agreement, or contract terms). If you’re unsure, it’s worth checking how your payroll categorises each earning type and ensuring that matches your super obligations.

3. Payment In Lieu Of Notice

Payment in lieu of notice is paid when you end employment immediately and pay the employee what they would have earned during the notice period (instead of requiring them to work it).

This is a common pain point for employers because:

• it’s calculated by reference to what the employee would have earned if they worked the notice period, but
• it is paid because employment ends immediately, and for SG purposes it is generally not treated as OTE.

In most cases, super is generally not payable on payment in lieu of notice. The key is to ensure your payroll records it correctly as a termination payment (and doesn’t accidentally treat it as ordinary wages).

If your business regularly has to pay out notice (for example, because you prefer an immediate exit for security or operational reasons), it’s a good idea to set consistent rules in your employment documentation and payroll setup. A well-drafted Employment Contract can help by clearly setting out notice entitlements and how termination pay is handled.

4. Unused Annual Leave Paid Out On Termination

Super is generally not payable on unused annual leave paid out on termination.

That said, you still need to pay out unused annual leave correctly, including calculating the right rate and considering any applicable leave loading arrangements (depending on the Award/contract).

If you want to sanity-check your offboarding approach around leave, annual leave on resignation is a helpful reference point for what employers commonly need to do.

5. Long Service Leave Paid Out On Termination

Long service leave is a State/Territory-based entitlement (with different rules depending on where the employee is employed).

Like annual leave, super is commonly not payable on long service leave paid out on termination. But you still need to ensure you’ve correctly identified:

• whether the employee is entitled to a payout (including pro-rata entitlements)
• the correct payout rate
• any special rules triggered by resignation versus redundancy versus dismissal

If you operate across multiple States, this is an area where a standard process can break down, so it’s worth getting advice tailored to your footprint.

6. Redundancy Pay

In a genuine redundancy, an employee might receive redundancy pay (subject to eligibility under the Fair Work Act 2009 (Cth), an Award, an enterprise agreement, or a contract).

Super is generally not payable on redundancy pay itself, because it is not ordinary time earnings.

But be careful here: a “redundancy final pay” can also include ordinary wages up to the termination date and possibly notice (worked or paid in lieu). Those wage-like components may still attract super even where redundancy pay does not.

As a practical step, redundancy is one of those situations where you’ll want to separate:

• ordinary earnings (usually superable), from
• termination-only amounts like redundancy (often not superable)

For a quick sense-check of typical redundancy entitlements (separate from super), a redundancy calculator can help you estimate the redundancy component before you finalise the full termination payout.

7. Bonuses, Commissions And Incentives

Bonuses and commissions are where things can get messy quickly.

As a small business, you might pay:

• a monthly or quarterly sales commission
• an annual performance bonus
• a sign-on bonus or retention bonus
• a discretionary “thank you” payment at exit

Whether super is payable can depend on whether the payment is treated as ordinary time earnings (for example, if it’s a regular component of remuneration) versus a more genuinely discretionary or irregular amount.

If you use incentive structures, it’s worth ensuring your contracts, bonus plans and payroll categories are aligned. Otherwise, you can end up with disputes about whether a bonus was “owed” at termination and whether super should have been paid on it.

Common Mistakes Employers Make With Super On Termination Pay

Even businesses with great payroll systems can slip up at termination time because final pay is not “business as usual”. Here are some common traps we see.

Mixing Everything Into One Lump Sum

If you process the final payment as a single line item (instead of separating wages, leave, notice, redundancy etc.), it’s much harder to confidently work out whether superannuation should be applied to each component.

It can also create reporting and audit issues later, because you can’t easily show which part of the final pay was treated as OTE.

Assuming Super Is Never Payable Because “Employment Has Ended”

Super obligations don’t disappear just because the employee is leaving.

If the final pay includes ordinary earnings (for example, the last week’s wages), super may still be payable on those ordinary earnings even though it’s included in a termination payout.

Paying Super On Everything “Just To Be Safe”

Sometimes employers think the risk-averse approach is to pay super on all termination amounts.

While that sounds harmless, it can:

• create inconsistencies across employees
• inflate employment costs unexpectedly
• cause confusion if you later try to standardise payroll practices

It’s usually better to get the classification right upfront rather than overpaying in an unstructured way.

Ignoring The Contract / Award Framework

Super is one compliance piece, but termination pay is also affected by:

• minimum notice requirements
• award classification and pay rates
• leave loading rules
• redundancy entitlements and consultation obligations

That’s why it’s helpful to treat termination as an “employment law + payroll + documentation” project, not just a payroll calculation.

A Practical Checklist For Handling Super And Termination Payments

If you want a repeatable internal process (especially if you don’t have a big HR team), here’s a checklist you can adapt for your business.

Step 1: Identify The Termination Type And End Date

• Is it a resignation, dismissal, redundancy, or end of a maximum-term/fixed-term arrangement?
• What is the employee’s last day of work?
• Are they working out notice, or are you paying in lieu?

Step 2: Break The Final Pay Into Clear Components

At a minimum, separate:

• ordinary wages up to the final day
• notice (worked or paid out)
• unused annual leave
• unused long service leave (if any)
• redundancy pay (if applicable)
• bonuses/commissions (if payable)

Step 3: Decide What Is OTE (And Apply Super Accordingly)

This is the heart of whether super is payable on termination payments. Once you’ve separated the components, you can apply super where it is required and avoid applying it where it is not.

If you’re consistently unsure, it’s a sign your contracts and payroll categories may need tightening up so you’re not forced to re-litigate the same questions with every termination.

Step 4: Check Your Paperwork Matches What You’re Paying

Good documentation helps prevent disputes after the person leaves.

Depending on your situation, it can be helpful to ensure you have up-to-date:

• an Employment Contract that reflects how notice, incentives, and other entitlements work
• internal policies about bonuses and commissions (especially around eligibility at termination)
• termination letters that clearly set out the final pay components

If you’re scaling up and employing more staff, having a clear relationship with an Employment Lawyer can make terminations (and the lead-up to them) much more manageable.

Step 5: Keep Records So You Can Explain The Calculation Later

Even when a termination is amicable, it’s not unusual for questions to come up later (from the former employee, your bookkeeper, or an external auditor).

It’s worth keeping:

• the calculation worksheet showing how each termination component was calculated
• the employee’s leave balances and pay rates used
• copies of relevant employment documents and correspondence

Key Takeaways

• Is super payable on termination payments? It depends on what the final payment is made up of - some components commonly attract super, others commonly don’t.
• To get it right, separate the final pay into components (wages, notice, leave, redundancy, bonuses) rather than treating it as one lump sum.
• Ordinary wages up to the last day will usually attract super in the normal way.
• Unused leave payouts and redundancy amounts are commonly treated differently to ordinary earnings, and super is often not payable on those termination-only components.
• Payment in lieu of notice and bonuses/commissions are common trouble spots - ensure your contracts, payroll categories and processes are aligned so you apply super consistently (and record amounts correctly).
• Having the right documents (and a consistent offboarding process) makes it easier to stay compliant and reduces disputes after the employee leaves.

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