Managing people

Do you pay super on cashed out annual leave?

Is cashed out annual leave considered ordinary time earnings when calculating the superannuation guarantee employer contribution?

14 December 2023

The short answer is yes. Cashed out annual leave is considered part of an employee’s ordinary time earnings (OTE) for the purpose of calculating the super guarantee rate under the relevant legislation. As of 1 July 2023, the SG rate is 11%, increasing to 11.5% on 1 July 2024 and 12% on 1 July 2025.

The Australian Taxation Office issued a Ruling in 2009 that states lump sum arrears payments of unused leave, other than on termination, are OTE. Unused leave paid out on termination of employment, however, is not included in an employee’s OTE for superannuation guarantee purposes.

Where an award or agreement has superannuation entitlements more beneficial than those prescribed by the superannuation guarantee legislation, an employer must comply with the award or agreement.

What is considered ordinary time earnings (OTE)?

According to the Australian Taxation Office, the following types of payments are considered ordinary time earnings (OTE) for super guarantee purposes: 

  • over award payments
  • shift loadings
  • commission payments
  • allowances or loadings related to an employee’s work, e.g. casual loading, site allowance, dirt allowance, freezer allowance, danger allowance, retention allowance, etc.
  • bonuses related to ordinary hours of work, e.g. performance bonus, bonus labelled as ‘ex-gratia’ but in respect of ordinary hours of work, Christmas bonus,; piece rates
  • paid leave and holiday pay
  • lump sum arrears payments of unused leave or salary and wages (other than on termination)
  • payments in lieu of notice
  • workers compensation (returned to work)
  • directors’ fees.

Amounts excluded are:

  • overtime payments
  • lump sum payments on termination, e.g. payment in lieu of unused sick leave, annual leave or long service leave payments
  • on call or availability allowance (except doctors)
  • paid parental leave or other kinds of ancillary leave
  • leave loadings
  • ‘top up’ payments, e.g. jury service payments, defence reserve forces,; private or domestic work under 30 hours per week
  • fringe benefits and other non-cash payments
  • some workers compensation payments (not working)
  • expense allowance payments and reimbursement of expenses incurred by an employee
  • redundancy payments
  • payments for unfair dismissal.

Things to note about OTE and the super guarantee

  • Overtime may constitute OTE if the earnings relate to an employee’s ordinary hours of work. An employee’s ‘ordinary hours of work’ are the hours specified as his/her ordinary hours of work under the relevant award or agreement, or under the combination of such documents, that governs the employee’s conditions of employment.
  • If an employee’s ordinary hours of work are not specified in a relevant award or agreement, then the employee’s ordinary hours of work are the ‘normal, regular, usual or customary hours worked by the employee, as determined in all the circumstances. This requires an employee-by-employee analysis.
  • Where it is not practicable to determine an employee’s regular, usual or customary hours of work, the employee’s ordinary hours of work will be the actual hours worked by the employee. This may increase the cost of superannuating employees who are not covered by an award or agreement detailing the employee’s ordinary hours of work.
  • A bonus is regarded as OTE in most cases. Only ‘a discrete and clear identifiable bonus payment that relates solely to work performed entirely outside ordinary hours will not constitute OTE’. Even ex gratia bonuses that are not expressly linked to performance, such as Christmas bonuses, are considered OTE. 

A final note 

Cashed out annual leave is included in an employee’s ordinary time earnings for the purpose of calculating the superannuation guarantee’s employer contribution.

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