When someone leaves your business, you’ll need to finalise their pay and make sure superannuation has been handled correctly. It sounds simple, but it’s an area that regularly trips up employers because not all termination payments are treated the same for Superannuation Guarantee (SG) purposes.
In Australia, super is generally only payable on ordinary time earnings (OTE). The tricky part is working out which termination amounts are OTE and which aren’t. In this guide, we’ll walk through what counts as a termination payment, when super must be paid, and how to handle edge cases confidently and compliantly.
By the end, you’ll know the typical rules for annual leave, long service leave, notice, redundancy and common Employment Termination Payments (ETPs) - plus the practical steps to get final pays right.
What Counts As A Termination Payment?
“Termination payments” is a catch‑all term for the various amounts you might owe when employment ends. Understanding the category of each payment is the key to knowing whether super applies.
- Outstanding Wages: Any ordinary hours the employee worked but hadn’t been paid for at the time they left.
- Unused Annual Leave: A lump sum for accrued leave not taken during employment (may include leave loading).
- Unused Long Service Leave: Accrued entitlement paid out on exit under state or territory laws.
- Payment In Lieu Of Notice (PILON): Paid when you end employment without requiring the notice period to be worked.
- Redundancy Pay: Statutory redundancy entitlements (and, where relevant, the “genuine redundancy” tax‑free component).
- Employment Termination Payments (ETPs): Certain lump sums made because employment ends, such as ex‑gratia amounts, golden handshakes, damages for wrongful dismissal, or cashing out entitlements that aren’t annual or long service leave (for example, unused rostered days off (RDOs) in some workplaces).
Each of these is treated differently for super. The next section sets out the rules you can apply consistently.
When Is Super Payable On Termination Amounts?
The starting point is the ATO’s OTE framework. Superannuation is generally payable on remuneration for ordinary hours of work. Most lump sums paid because employment has ended are not OTE, but there are important exceptions.
- Outstanding wages for ordinary hours: Super is payable because these are OTE you would have paid if the person had remained employed. If the employee’s final pay includes ordinary hours from the last pay cycle, SG applies.
- Overtime hours: Overtime is not OTE. If you’re paying out overtime performed but not yet paid, that portion doesn’t attract SG.
- Unused annual leave (and loading) on termination: No SG is payable. These are lump‑sum termination amounts, not OTE.
- Unused long service leave on termination: No SG is payable.
- Payment in lieu of notice (PILON): SG is generally payable. The ATO treats PILON as a substitute for ordinary hours that would have been worked during the notice period, so it counts towards OTE.
- Redundancy pay: No SG is payable on the redundancy component (including genuine redundancy amounts up to the tax‑free cap). Treat other components individually (e.g. PILON) to determine if SG applies.
- ETPs (e.g. ex‑gratia, golden handshake, compensation for dismissal, certain unused RDOs): No SG is payable on ETPs because they are not OTE.
If you’d like to ground your decision‑making, it can help to revisit how Ordinary Time Earnings work and why some amounts are superable while others aren’t.
Quick Reference: Super On Common Termination Payments
| Payment Type |
Super Payable? |
| Outstanding wages (ordinary hours) |
Yes |
| Overtime hours (including on termination) |
No |
| Unused annual leave (on termination) |
No |
| Annual leave loading (on termination) |
No |
| Unused long service leave (on termination) |
No |
| Payment in lieu of notice (PILON) |
Yes |
| Redundancy pay (genuine redundancy component) |
No |
| ETPs (ex‑gratia, golden handshake, damages, certain unused RDOs) |
No |
These are general rules. Always check applicable awards or enterprise agreements as they can impose additional requirements beyond the minimum.
How Specific Termination Components Are Treated
Unused Annual Leave (And Loading)
Lump‑sum payouts of accrued annual leave on termination don’t attract SG. The same applies to leave loading when paid on exit. These amounts relate to past accruals and are not payment for current ordinary hours.
If you’re finalising an employee who resigns, it can be helpful to confirm how leave is handled overall, including annual leave on resignation and how those figures appear on the final payslip.
Long Service Leave
Long service leave paid out at the end of employment does not attract SG. That’s consistent across resignation, retirement and redundancy scenarios. State and territory laws set entitlement rules, but the super treatment is consistent: no SG on the termination lump sum for long service leave.
Payment In Lieu Of Notice (PILON)
PILON is the standout exception: it’s generally superable because it substitutes for ordinary hours the employee would otherwise have worked during the notice period. In practice, that means you calculate SG on the PILON amount just as you would if the person remained on the books working their notice.
For more on this, see Payment in Lieu of Notice and Superannuation and our broader guide to Payment in Lieu of Notice.
Redundancy Pay
Redundancy pay itself doesn’t attract SG. However, termination packages often include multiple components. Treat each line item on its merits - for example, if the package includes PILON, SG applies to the notice component even though the redundancy component is not superable.
If you’re modelling a restructure, it can be useful to run numbers using a redundancy calculator or work through how to calculate redundancy pay before you communicate with affected team members.
Employment Termination Payments (ETPs)
ETPs are a category of lump sums paid because employment ends (outside of annual leave and long service leave). Common examples include ex‑gratia payments, golden handshakes, certain compensation or damages for dismissal, and in some industries, cashing out unused rostered days off (RDOs).
These ETP amounts do not attract SG because they’re not OTE. Keep in mind that ETPs have specific tax rules and reporting requirements; it’s wise to coordinate with your accountant when processing them so tax treatment and payment summaries are correct.
How To Calculate And Pay Super On The Final Pay
Once you’ve broken down the final pay into its components, apply SG to the superable parts only. A practical approach that many employers use:
- Itemise every component on the termination worksheet: outstanding ordinary hours, overtime, unused annual leave, unused long service leave, PILON, redundancy pay and any ETP amounts.
- Mark “superable” vs “not superable” using the rules above (and any specific award or agreement obligations).
- Apply the current SG rate to the superable subtotal only (for most employers, this is outstanding ordinary hours and any PILON).
- Schedule the payment to the employee’s nominated super fund by the usual SG due date for the quarter in which the payment is made.
- Issue a detailed final payslip that clearly shows each component and the SG calculation.
If you’re pulling numbers from your payroll system, double‑check that your settings correctly tag termination items for super. Many errors happen because a default category (for example, a notice item) wasn’t mapped to OTE.
For an end‑to‑end view of processing an exit, it’s worth revisiting your checklist for calculating final pay so deductions, leave payouts, tax and super all balance.
Edge Cases, Casuals And Contractors
Not every scenario fits neatly into a single rule. Here are common edge cases we see - and how to handle them confidently.
Casual Employees
- Casuals don’t accrue annual leave, so there’s usually no leave payout at the end of engagement.
- Super is still payable on their ordinary hours during employment (including any ordinary hours in the final pay cycle). If a casual is paid a notice amount that is genuinely in lieu of ordinary hours, treat PILON as superable.
- Overtime remains non‑superable (not OTE).
Part‑Time And Full‑Time Employees On Awards
Most awards follow the OTE framework in practice, but some instruments contain nuances (for example, how certain allowances or loadings are treated). If your workforce is covered by a modern award or enterprise agreement, apply those terms in addition to the OTE rules. When in doubt, seek advice before processing complex exits.
Independent Contractors
Some contractors are “employees” for SG purposes if they’re paid mainly for their labour. If a contractor falls into that category, SG may be payable on amounts that align with OTE (for example, ordinary hours equivalents) but not on termination‑style lump sums. Classification is fact‑dependent, so consider a quick review if you’re unsure.
Unpaid Ordinary Hours, Allowances And Loadings
- Unpaid ordinary hours: Superable (these are OTE).
- Overtime: Not superable.
- Most allowances: Generally not OTE unless they’re paid for ordinary hours and form part of the employee’s usual earnings. Check the wording and practice.
ETP Sub‑components Like Unused RDOs Or Sick Leave
If your workplace has entitlements such as RDOs that can be cashed out on termination as part of an ETP, those amounts are not OTE and don’t attract SG. Similarly, lump sums for unused sick leave when paid as part of an ETP are not superable.
Set Yourself Up For Compliance And Fewer Disputes
Getting termination pays right is easier when your foundations are strong. A few practical steps:
- Use clear contracts: A well‑drafted Employment Contract should explain notice, leave, super and redundancy to reduce confusion at exit.
- Standardise your process: Keep a termination checklist that covers categorising payments for SG, tax and reporting. Many employers also keep templates within an employee termination documents suite.
- Document assumptions: Where judgment calls are made (for example, an allowance’s OTE status), note the basis and keep it with the payroll record.
- Communicate early: Give departing employees a breakdown of their final pay components and when super will be paid.
- Coordinate with finance: ETPs and genuine redundancy payments have distinct tax treatment and reporting. Work with your accountant so PAYG withholding, STP reporting and payment summaries align with the amounts you’ve categorised for SG.
If termination involves notice management, make sure your approach to Payment in Lieu of Notice and your super settings align to avoid SG shortfalls.
Key Takeaways
- Superannuation is generally payable only on ordinary time earnings - typically outstanding ordinary hours and any payment in lieu of notice.
- Lump‑sum termination amounts such as unused annual leave, unused long service leave, redundancy pay and most ETPs (including ex‑gratia payments and unused RDOs where applicable) do not attract SG.
- Break final pays into components and apply SG only to the superable parts; issue a clear, itemised payslip reflecting those decisions.
- Awards and enterprise agreements can add obligations, so check the instrument that covers your employees before you process complex exits.
- Solid foundations - clear contracts, a consistent process and accurate payroll settings - reduce the risk of SG shortfalls, audits and disputes.
If you’d like a consultation on superannuation and your obligations when processing termination payments, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.
