It’s one of the most common requests a payroll team gets from a departing employee: “Can you just pay my termination pay straight into super?”
The short answer is almost always no. The longer answer depends on what makes up the termination pay, and whether the employee planned ahead. Here’s how the rules work for each type of payment, and what you can and can’t do as the employer.
Key takeaways
- Salary sacrifice only works for salary and wages the employee hasn’t earned yet. Anything already earned or accrued is too late to sacrifice.
- Unused leave can only be sacrificed if a written agreement was in place before the leave accrued, and only for leave accrued after that date.
- Redundancy pay and employment termination payments (ETPs) can’t be salary sacrificed at all.
- Bonuses can only be sacrificed if the agreement was in place before the work that earned them was done.
- Cashed out leave can’t be sacrificed directly, but there’s a legitimate work-around using the employee’s normal pay.
The rule that decides everything: it has to be future earnings
The ATO’s salary sacrifice ruling (TR 2001/10) allows employees to sacrifice future salary and wages in exchange for another benefit from their employer, most commonly super contributions or a novated lease. The ATO’s guidance for employers sets out the same test: the arrangement must be entered before the employee performs the work, there should be a written agreement, and the employee can’t be able to access the sacrificed salary.
The word doing all the work there is “future”. An effective salary sacrifice arrangement must be in place before the employee earns the money. Once salary, wages or leave have been earned or accrued, the character of the payment is locked in and it must be paid as normal taxable income.
Every scenario below comes back to this principle. We’ve also covered the broader mechanics in our salary sacrifice FAQ.
Unused leave on termination
Leave counts as salary and wages, so in theory it can be sacrificed. In practice, the timing requirement makes this rare.
An employee can only sacrifice leave that accrued after their salary sacrifice agreement was put in place. The ruling deals with when leave is treated as earned at clauses 89 and 90.
Here’s what that looks like in practice. Say an employee plans to retire in a year. If they enter a written salary sacrifice agreement now, they can sacrifice the annual leave and long service leave that accrues between the agreement date and their termination date. But everything already sitting in their leave balance before the agreement was signed has to be paid out as normal.
Very few employees think to set this up years in advance, which is why the answer to “can I sacrifice my leave payout” is almost always no by the time anyone asks.
For how unused leave should actually be paid and taxed on the way out, see our guide to rates of pay on termination and Lump Sum D.
Redundancy pay and ETPs
These can’t be sacrificed at all. Redundancy pay and ETPs aren’t treated as salary and wages for salary sacrifice purposes, and the ruling doesn’t cover them, which is enough to rule them out.
The ATO’s guidance on ETPs also puts it beyond doubt: ETPs can’t be rolled over into super, and a payment generally needs to be received within 12 months of termination to qualify for concessional tax treatment.
So when a departing employee asks for their redundancy to go to super, the answer is a firm no, regardless of any agreement or how much notice they gave.
Keep in mind that ETPs cover more than redundancy. A payment in lieu of notice is also an ETP, with its own super treatment, and we’ve unpacked that in pay in lieu of notice vs gardening leave. The ETP cap itself is indexed each year, and the current figures are in our 1 July payroll changes roundup.
Bonuses, commissions and incentives
Same principle, different trigger. To sacrifice a bonus, the employee needs the arrangement in place before doing the work that earns it (clause 23 of the ruling).
If the work is already done, it’s too late, even if the bonus hasn’t been calculated or announced yet. The entitlement exists from the moment the work was performed.
Cashing out leave during employment
A related question we’re often asked: can an employee cash out annual leave while still employed, and sacrifice that payment to super?
There are two separate steps here, and each has its own rules.
Step 1: cashing out the leave
Most modern awards now allow annual leave to be cashed out, following changes made by the Fair Work Commission in 2016. The Fair Work Ombudsman’s conditions are:
- a separate written agreement, signed by both parties, for each cash out
- the employee must keep at least 4 weeks of accrued annual leave after the cash out
- under most awards, no more than 2 weeks can be cashed out in any 12-month period
- the payment must match what the employee would have received if they’d taken the leave, including leave loading
Award-free employees can cash out leave by written agreement, subject to the same 4-week minimum balance. If an enterprise agreement applies, it needs to specifically allow cashing out.
Step 2: sacrificing the payment
This is where it falls over. The leave being cashed out has already accrued, so it’s too late to sacrifice it. It has to be paid as wages, taxed like a bonus, and yes, super is payable on it.
The work-around. There’s a legitimate way to get a similar result. Instead of trying to sacrifice the cashed out leave, the employee sacrifices the equivalent amount of their normal pay for days or weeks not yet worked, and takes the cashed out leave as wages in the same pay period. Their gross pay for the period ends up the same, the sacrifice is valid because it applies to future earnings, and the money still finds its way to super. The tax for that period may differ slightly, and it only works for employees who are allowed to cash out leave in the first place.
One more thing for employers: the super guarantee
If you’re setting up any of these arrangements, remember that since 1 January 2020, salary sacrificed super contributions no longer count towards your super guarantee obligations, and they don’t reduce the earnings base you calculate SG on. You pay SG on the employee’s full ordinary time earnings, including any amount they’ve sacrificed. This catches out employers who set up arrangements under the old rules and never revisited them.
FAQs
Can an employee salary sacrifice their annual leave payout on termination?
Only if a written salary sacrifice agreement was in place before the leave accrued, and only for the leave accrued after that date. Leave accrued before the agreement must be paid out normally.
Can redundancy pay be salary sacrificed into super?
No. Redundancy pay and ETPs aren’t salary and wages for salary sacrifice purposes and can’t be sacrificed or rolled into super.
Can a bonus be salary sacrificed?
Only if the arrangement was in place before the employee did the work that earned the bonus. Once the work is done, it’s too late.
Can cashed out annual leave go straight to super?
Not directly, because the leave has already accrued. The work-around is to sacrifice an equivalent amount of future normal pay in the same period the leave is cashed out.
Does salary sacrificing super reduce what the employer has to pay?
No. Since 1 January 2020, sacrificed amounts don’t count towards super guarantee and don’t reduce the earnings base SG is calculated on.
Get termination pay right the first time
Termination pay is one of the areas where payroll errors are hardest to unwind, because the money has already left the building. If you’d like a second set of eyes on how your termination payments, salary sacrifice arrangements or leave cash outs are being processed, our managed payroll service handles this every week. Call us on 1300 851 133 or send us an enquiry below.