Overview
This article explains why superannuation is generally not payable on unused leave or associated leave loading when an employee is terminated or made redundant. The information is based on legislative guidance and interpretations from the Australian Taxation Office (ATO).
Legislative Background
Under superannuation legislation, employers are required to pay super on Ordinary Time Earnings (OTE). The ATO clearly states:
“Payments for unused annual leave and any associated leave loading, as well as unused long service leave, do not form part of OTE, and therefore are not subject to superannuation.”
This guidance is available in the ATO’s official List of Payments that are OTE.
History and Interpretation of Leave Loading
Leave loading originated in the 1970s through union efforts to address the loss of overtime and income-generating opportunities during employee leave. It was introduced to compensate for this lost income, and as such, has historically been considered a form of overtime.
When superannuation became compulsory in 1994, this context contributed to leave loading being excluded from OTE.
Whether leave loading is superable may depend on how it is defined in your organisation's employment contracts or enterprise agreements. If the payment is clearly linked to lost overtime, then it is not considered OTE and super is not required to be paid.
Super on Termination and Redundancy Payouts
When unused leave (such as annual or long service leave) and associated loadings are paid out at termination or redundancy, these payments are not linked to ordinary time earnings. Therefore, superannuation contributions are not required for these amounts.
This treatment aligns with both ATO guidance and commentary from the Australian Board of Taxation.
Employer Discretion
While legislation does not require super to be paid on leave payouts or loading at termination, organisations may choose to provide additional benefits above the minimum standard. This can include paying super on these amounts as a matter of internal policy.
References