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When an employee leaves your business – whether they have been made redundant or simply decided to retire – there are lots of different types of termination payments you need to pay.
Calculating these termination payments can be confusing, but not all of them need to be included when you calculate the final super contributions you need to make to their super fund.
Then there’s the question of what happens with a retiring employee’s super and the advice or assistance you are permitted to provide as they move into their new life stage.
Super and employee termination payments
An employee termination payment (ETP) is a lump sum payment made when the employment of one of your employees is terminated. The termination can be for a range of reasons, from redundancy to retirement or resignation.
For an employer, the key point to remember is that just because a payment is an ETP, it doesn’t necessarily mean you are required to make Super Guarantee (SG) payments on it.
Under the SG rules, employers must make quarterly SG contributions on behalf of their employees calculated at 10% (in 2021–22) of the employee’s ordinary time earnings (OTE). (The SG rate is scheduled to increase by increments of 0.5% until it finally reaches 12% on 1 July 2025.)
In most cases, OTE covers an employee’s ordinary hours of work plus any bonuses, allowances, annual leave and sick leave.
Some termination payments, however, are excluded from OTE, including overtime, annual leave loading, parental leave and on-call and fully expensed allowances. The main termination payments that aren’t eligible for an SG contribution are listed in the table.
| Employee termination payment | Is super paid? |
|---|---|
| Termination payments: in lieu of notice | Yes |
| Termination payments: unused annual leave | No |
| Termination payments: unused long service leave | No |
| Termination payments: unused sick leave | No |
| Termination payments: redundancy payments | No |
| Workers’ compensation (returned to work) | Yes |
| Workers’ compensation (not working) | No |
| Ancillary leave (jury duty, defence force reserves) | No |
| Parental leave (maternity, paternity, adoption) | No |
Source: ATO website
What is the process when an employee retires?
For employers, the key issue when an employee retires is calculating their termination benefits. If your retiring employee plans to withdraw their super benefits, access to their savings is governed by the super laws and administered by their super fund, so you don’t need to worry about helping them withdraw their money.
As super savings are designed to be used in retirement, there are strict rules governing your employee’s ability to access their super before they reach their preservation age.
Once your employee reaches their preservation age, they can access their super benefits, but they still need to meet a condition of release and apply to their super fund to withdraw their savings.
Depending on your employee’s preference, generally their super benefit can be paid as an income stream or a lump sum, or a combination of the two:
- Income stream (super pension or annuity): A series of regular payments from the super fund. These must be paid at least annually and must meet the government’s minimum annual payment rules.
- Lump sum: A single payment that withdraws some or all of the super benefit. With a lump sum withdrawal, the money is no longer within the super system. If it’s then invested, any investment return is taxed like normal income, not super. This means the concessional tax rate of 15% on a super account’s earnings no longer applies.
Whether or not your employee will have to pay any tax when they withdraw their super benefits after retiring depends on:
- Whether they have reached their preservation age
- Whether they plan to take a lump sum or an income stream
- The tax-free and taxable components in their super benefit
- The current low-rate threshold or cap.
Once your employee reaches age 60, they can withdraw their super benefit more easily and most people will pay no tax. Your employee, however, will still need to meet a condition of release. At this age, common conditions of release include retiring from the workforce or starting a transition-to-retirement pension.
A big attraction of taking a super benefit after age 60 is that for most people not only is their money free of any benefit payments tax, it’s also free of income tax if they take it as an income stream.
Useful resources for your retiring employees
If you have an employee who is retiring, there are a number of decisions for them to make. That means they need lots of information about their finances – and their super in particular.
Government agencies offer a number of free resources to help people planning for their retirement. If your employee asks for help, you could direct them to the following websites:
- ASIC’s MoneySmart website
- Services Australia’s Financial Information Service
SuperGuide offers more than 500 articles, how-to guides, checklists and tips on retirement planning, tax-friendly investment and retirement strategies, and detailed guides on how to enjoy your retirement. We also provide regularly updated performance rankings for super pension funds.
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