The Australian superannuation is undergoing its most significant structural shift since the introduction of Single Touch Payroll (STP). For decades, Ordinary Time Earnings (OTE) has served as the primary benchmark for calculating Superannuation Guarantee (SG) obligations. However, the federal government’s Payday Super reforms, scheduled to take effect on 1 July 2026, introduce a new statutory concept: Qualifying Earnings (QE).
While OTE and QE share a common lineage, the transition represents more than a simple name change. It is a recalibration designed to align superannuation with modern payroll frequencies and to close loopholes that have historically led to underpayment. For employers, payroll providers, and financial officers, understanding the technical nuances between OTE and QE is critical for maintaining compliance and managing labor costs.
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The Evolution from OTE to QE
To understand Qualifying Earnings, one must first define the current standard. Ordinary Time Earnings (OTE) refers to the amount an employee earns for their ordinary hours of work. This typically includes base salaries, shift loadings, commissions, and certain allowances. It explicitly excludes overtime.
The challenge with OTE has always been its interaction with the quarterly contribution cycle. Under the current regime, employers are only required to remit super contributions to funds four times a year. This lag creates a disconnect between the work performed and the retirement benefit accrued. Furthermore, the definition of OTE has been subject to various interpretations, particularly regarding commissions earned on overtime or specific bonus structures.
The introduction of Qualifying Earnings (QE) under the Treasury Laws Amendment Bill aims to standardize the contribution base. QE is defined as the total of all OTE amounts, plus specific additional payments that were previously excluded or ambiguously treated.
Defining the Qualifying Earnings Base
Qualifying Earnings serves as the denominator for the SG percentage (currently 11.5% and moving toward 12%). Under the new rules, QE is built upon several core components:
1. The Retention of OTE Core
The vast majority of what currently constitutes OTE will transition directly into the QE definition. This includes:
- Standard wages and salaries.
- Over-award payments and shift loadings.
- Performance-based bonuses and commissions.
- Allowances that are not a reimbursement of expenses (such as tool or site allowances).
2. The Treatment of All Commissions
A primary distinction in the new rules is the treatment of commissions. Under OTE rules, if a commission was demonstrably linked to work performed entirely outside of ordinary hours (overtime), it could arguably be excluded from the super calculation base.
QE removes this ambiguity. All commissions paid to an employee are included in Qualifying Earnings, regardless of whether the underlying activity occurred during “ordinary” hours or “overtime” hours. This reflects the ATO’s view that commissions are a reward for productivity and should universally attract superannuation.
3. Salary Sacrifice Integrity
Under previous iterations of the law, some employers were able to reduce their SG liability by calculating super only on the “post-sacrifice” salary. While 2020 reforms largely fixed this, the QE framework reinforces the “gross-up” principle. QE includes any amounts that would have been OTE had they not been sacrificed into superannuation under a salary packaging arrangement.
4. Contractor Inclusion
The definition of an “employee” for super purposes is broader than the common law definition. It includes individuals working under a contract that is wholly or principally for labour. QE formalizes the payments made to these SG employees as part of the calculation base, ensuring that the same payday rules apply to independent contractors who fall within the super net.
What is Excluded?
Despite the broadening of the base, QE maintains specific exclusions to prevent the over-burdening of employers and to keep the focus on earnings rather than costs.
- Overtime: Genuine overtime payments remain excluded from QE. However, the definition of overtime remains strictly scrutinized. If an employee has no defined ordinary hours, then all hours worked are generally considered ordinary, making the entire payment subject to QE.
- Expense Reimbursements: Payments made to reimburse an employee for expenses incurred in the course of their work (where there is a reasonable expectation that the money will be spent on that expense) do not constitute QE.
- Certain Termination Payments: While some portions of a termination payment (like unused annual leave or long service leave paid out upon resignation) have historically been excluded from OTE, they remain excluded from QE to avoid inflating super obligations during redundancy or retirement events.
The Payday Super Mechanism
The shift to QE is inextricably linked to the Payday Super mandate. Starting 1 July 2026, employers must remit superannuation contributions within seven business days of the “payday” on which the QE was paid.
This is a fundamental shift from the quarterly system. Currently, an employer might hold onto super liability for up to four months, using that cash flow for operations. Under the QE model, the liability is triggered immediately upon payment of the earnings. This necessitates a more robust cash flow management strategy, as the “float” previously enjoyed by businesses will vanish.
The Transition from Quarterly to Annual Caps
Perhaps the most significant technical change for high-income earners and their employers is the shift in the Maximum Super Contribution Base (MSCB).
Under the OTE system, the MSCB is a quarterly cap. If an employee earns above a certain threshold in a single quarter (e.g., due to a large annual bonus), the employer is not required to pay super on the earnings above that cap.
Under the QE system, the cap transitions to an annual basis. This has major financial implications. In the quarterly model, a massive bonus paid in Q3 would be capped, potentially saving the employer thousands in super contributions. In the annual QE model, that bonus is added to the total annual earnings. Super must be paid on every dollar until the annual cap is hit. For businesses that utilize heavy incentive-based pay or large annual bonuses, this change will likely increase the total annual SG expense.
Compliance and STP Phase 3
The Australian Taxation Office (ATO) will monitor QE through enhanced Single Touch Payroll (STP) reporting. Under the new requirements, employers will be required to report:
- The total Qualifying Earnings paid in the period.
- The corresponding Superannuation Liability amount.
From 1 July 2027, the ATO has signaled that STP reports failing to include both these fields will be rejected. This dual reporting allows the ATO’s systems to automatically cross-verify if the employer is contributing the correct percentage (e.g., 12%) against the reported QE. If there is a discrepancy, the system will trigger automated nudges or audits.
Strategic Implications for Employers
The move to QE is not merely a payroll update; it is a treasury and human resources challenge.
1. Cash Flow Management:
Businesses must prepare for a 10% to 12% increase in the frequency of their cash outflows. The transition from 4 payments a year to 26 or 52 payments a year (depending on pay cycle) requires a total re-evaluation of working capital.
Related: Cash Flow Crisis? Managing your business bank balance with weekly super payments
2. Employment Contracts:
Contracts that define Total Remuneration Packages (TRP) must be reviewed. If a contract specifies a salary plus super, the expansion of the earnings base to include all commissions or the shift to an annual cap will directly increase the employer’s cost. If the contract is inclusive of super, the employee’s take-home pay might technically decrease as more of the package is diverted to the super fund to cover the broadened QE base.
3. Audit Readiness:
Because QE is reported every payday, the ATO will have real-time visibility into underpayments. The “waiting period” that allowed companies to catch up on super before the quarterly deadline is gone. Late payments will trigger the Superannuation Guarantee Charge (SGC) automatically, which is non-deductible and carries heavy interest penalties.
Summary
The transition from OTE to Qualifying Earnings represents the final step in the professionalization of Australia’s payroll systems. By broadening the base and requiring payday frequency, the government is ensuring that superannuation is treated with the same urgency as PAYG withholding.
For employers, the 2026 deadline provides a window to audit current payroll categories, update employment contracts, and adjust cash flow forecasts. Understanding that QE is a wider net than OTE is the first step in avoiding the costly penalties associated with the upcoming Payday Super regime.
Frequently Asked Question
How does the shift from a quarterly to an annual cap impact costs?
The Maximum Super Contribution Base moves from a quarterly to an annual cap, meaning employers can no longer “cap out” super on large bonuses in a single quarter and must pay until the yearly limit is reached.
Are all commissions included in the new Qualifying Earnings base?
Yes, the new rules close the overtime loophole by including all commissions in the calculation, regardless of whether the work was performed during ordinary hours or overtime.
What happens if an employer fails to report Qualifying Earnings correctly?
The ATO will use STP data to flag underpayments, and by 2027, they will reject payroll files that do not report QE, triggering non-deductible interest charges and penalties.