Are you Paying Super on Annual Leave Loading?

On 12 March 2019, the Australian Taxation Office (ATO) issued a note regarding its view as to whether annual leave loading attracts Superannuation Guarantee (SG) contributions. This depends on whether leave loading is ordinary time earnings (OTE).

There is a commonly held view that annual leave loading is not OTE because its initial purpose was to compensate for the lost opportunity to work overtime when annual leave is taken.

However, since the inception of this entitlement this historical rationale has largely been lost.

The ATO has now confirmed that, in the absence of some evidence showing the loading is to compensate for the lost opportunity to work overtime, the loading will be OTE.

Most awards do not specifically state the reason the annual leave loading entitlement is provided.

If employers have self-assessed on the basis that their annual leave loading is not OTE, and there is a lack of evidence to demonstrate the purpose of the entitlement, there is a risk that they may have historical SG shortfalls and be liable for the SG charge.

The ATO has said it will not take issue with non-payment of SG contributions on annual leave loading in past quarters, where:

  • the employer self-assessed that the annual leave loading was not OTE, with the reasonable position that their annual leave loading was for a notional loss of opportunity to work overtime, and
  • there is no evidence that is less than five years old (the statutory period employers are expected to keep records relating to their SG affairs) that suggests the entitlement was for something other than overtime.

The employer can prove an entitlement to annual leave loading arising under an award or agreement is demonstrably referrable to a lost opportunity to work overtime, if there is written evidence related to the entitlement; i.e. in the express words of the award or agreement or other written evidence (for example, a documented policy) that clarifies the reason for the entitlement, and reflects the mutual understanding of both parties to the agreement that gives rise to the entitlement.

If employers do not have this evidence, the ATO expects them to ensure they obtain it as soon as practicable, or alternatively assess their future entitlements on the basis that their annual leave loading falls within OTE.

Where employers have obtained this evidence as soon as practicable, the ATO will not look at the purpose of the leave loading for quarters before they obtained the evidence.

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