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Termination payments: what are the super contribution rules?

The recent case of Willis v Health Communication Network Ltd1 makes clear that payments to a dismissed employee in lieu of notice must include an amount for the employer?s super contributions. Last year, we reviewed a case about when individuals can claim income tax deductions for personal superannuation contributions on the basis that they are 'substantially self-employed'.2 Julian Smith and Amber Chew

The superannuation component of a taxpayer's salary was nearly twice the amount the employer was statutorily required to contribute: the taxpayer was, according to the Court, effectively 'salary sacrificing' to make additional superannuation contributions. Consequently, the Court held that if the taxpayer had worked his full 6 months' notice period (as originally requested), then he would have received 6 months' base salary and 6 months' superannuation component. Therefore when the employer paid the taxpayer in lieu of notice, it had to pay the superannuation contribution as well as the salary.

The issue

Employers must make quarterly contributions to employees' superannuation funds equal to 9% of each employees' wage.3

The question in Willis was whether the employer was liable to pay the 9% contribution in respect of a termination payment made to an employee in lieu of the contractual period for notice.

The facts

On 13 April 2005, the taxpayer was summarily dismissed by his employer and his employment was terminated. Under the employment contract, the employer was required to give the taxpayer either 6 months' termination notice or payment in lieu of all or part of that period.

Initially, the employer asked the taxpayer to continue his employment throughout the 6 month notice period. But soon afterwards the employer decided to pay the taxpayer in lieu of notice. The employer then:

  • paid the employee 6 months' salary of $104,490 — being one half of his base salary of $208,980
  • but refused to pay any superannuation contributions in respect of that payment.

The taxpayer sued the employer and claimed that:

  1. he had been made redundant and was therefore entitled to receive an additional redundancy payment equivalent to 3.5 months' salary under his employment contract (redundancy issue); and
  2. the employer was required to make a 9% superannuation contribution to the taxpayer's nominated superannuation fund in respect of the notice payment (superannuation issue).

The District Court of New South Wales rejected the taxpayer's claims and found in the employer's favour.

The taxpayer appealed to the New South Wales Court of Appeal.

The redundancy issue decision

The Court of Appeal rejected the taxpayer's claim with regard to the redundancy issue.

The superannuation issue arguments

The Court heard the following submissions on the superannuation issue:

  • From the taxpayer the required 9% superannuation contribution under the Superannuation Guarantee (Administration) Act 1992 (Cth) (Act) applied to the notice payment — as it was equivalent to a salary payment.
  • From the employer the employment contract required that the superannuation contribution be paid to the taxpayer's nominated superannuation fund in accordance with the Act — rather than to the taxpayer personally. As such, the superannuation contribution could not be included in the notice payment. Apart from this, the employer did not raise any objection to the taxpayer's superannuation claim.

The employer's submission did not directly respond to the legal issue — namely what types of payments to an individual require a corresponding super guarantee payment to the individual's super fund.

The superannuation issue decision

The Court held in the taxpayer's favour.

The Court noted that the taxpayer had accepted a remuneration package which consisted of a base salary of $208,980 and a superannuation component of $18,808.20. The superannuation component constituted 9% of the base salary. However, employers in the relevant income year were only required to pay superannuation contributions on wages up to $134,880. The superannuation component was therefore nearly twice the amount the employer was statutorily required to contribute under the Act. As such, the taxpayer had effectively 'salary sacrificed' by accepting a higher superannuation contribution and a lower base salary.

Importantly, in the Court's view, had the taxpayer worked out the full 6 months' notice period, as originally requested, he would have received 6 months' base salary and 6 months' superannuation component.

In response to the employer's submissions, the Court stated that:

  • a payment made to a person's super fund is made entirely for their benefit, even though it is not paid directly to the person; and
  • even though the employer paid the taxpayer the notice payment instead of a salary, the employer still had to fulfil its statutory obligation to make the superannuation contribution to the taxpayer's super fund.

The Court concluded that the taxpayer was entitled to an order that the employer pay $9,404.10 (9% of 6 months' base salary), together with interest, to the taxpayer's super fund.


After the reasons for judgment had been written but before it was handed down, the employer informed the Court that it would, within 48 hours, pay $9,404.10 to the taxpayer's superannuation account (together with interest up to the date of payment).

The Court noted that this amounted to the employer conceding that the taxpayer had always been entitled to the superannuation contribution.

Essential superannuation resources

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More information

For more information:

  • in relation to this article, please contact Julian Smith on 03 9288 0555.
  • on superannuation generally, please contact Maddocks on 03 9288 0555 or 02 8223 4100 and ask for a member of the Maddocks Superannuation Team.

1 [2007] NSWCA 313 (Willis), a decision of the New South Wales Court of Appeal.
2 See ClearLaw October 2007 discussion of Falson v Commissioner of Taxation [2007] AATA 1668.
3 See Part 3 of the Superannuation Guarantee (Administration) Act 1992 (Cth).


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Andrew is a Partner in Maddocks Tax and Structuring team. He has significant experience in advising Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.

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