Is superannuation payable on annual leave loading?
On 12 March 2019, the Australian Taxation Office (ATO) provided an update in respect of ordinary time earnings (OTE), whether annual leave loading forms part of OTE and therefore, whether employers are obliged to pay superannuation on annual leave loading. This update is further to the ATO’s Superannuation Guarantee Ruling SGR 2009/02 (the Ruling) on this topic, which was introduced on 13 May 2009, but has since caused confusion amongst employers and employees.
The general position
The ATO’s position is that “the salary or wages that an employee receives in respect of periods of paid leave is a continuation of their ordinary pay during their ‘ordinary hours of work’ and therefore takes the place of earnings in respect of actual hours worked.”
Therefore, the general position in respect of superannuation on annual leave loading is that it forms part of an employee’s OTE and it must therefore be included in an employer’s calculations of an employee’s SG entitlement.
The exception
However, the Ruling provides an exception in respect of annual leave loading. According to the ATO, annual leave loading is not OTE if it is “demonstrably referable to a notional loss of opportunity to work overtime.”
Our interpretation of this exception is that the annual leave loading is “demonstrably referable to a notional loss of opportunity to work overtime,” if the annual leave loading is a payment which compensates an employee for not working overtime while they are on annual leave, whereby they would have worked overtime if they were not on annual leave.
In such circumstances, the annual leave loading is not considered OTE and employers do need to include this in their SG calculations.
We note, however, that the original purpose of the annual leave loading was to compensate employees for the notional loss of overtime while they were on annual leave.
Employers’ obligations moving forward
In its 12 March 2019 update, the ATO has acknowledged the uncertainty around this topic and the evidentiary difficulties in identifying the purpose for annual leave loading entitlements.
In respect of historical quarters, the ATO has stated that it won't apply compliance resources to scrutinising why annual leave loading was paid in historical quarters, where employers have self-assessed on the basis that their annual leave loading is not OTE, and there is a lack of evidence to demonstrate that the entitlement was for something other than overtime.
However, in circumstances where the above factors do not apply (for example, where there is evidence to suggest that the annual leave loading entitlement was for something other than overtime) and employers identify that they have SG shortfalls for historical quarters, they are required to lodge a Super Guarantee Charge statement with the ATO. The ATO has advised that, at its sole discretion, it may partially or fully remit additional penalties in respect of an SG shortfall. However, it cannot waive any components of the SG charge itself. In respect of evidentiary requirements for future quarters regarding the exception to the rule, the ATO has advised that it would be satisfied that the entitlement is ‘demonstrably referable’ to a lost opportunity to work overtime, if there is written evidence relating to the entitlement.
Many industrial awards do not specifically state the reason the annual leave loading entitlement is provided. Therefore, to ensure that employers satisfy their evidentiary requirements in proving that SG is not payable on annual leave loading, we recommend that such a provision is included in employees’ employment contracts, or a separate company policy.
