The ATO has recently clarified its position in relation to superannuation payments in respect of annual leave loading.
If you don’t already include annual leave loading when calculating superannuation payments you may need to review your position.
Is superannuation payable on annual leave loading?
As most employers are aware, superannuation contributions for employees are calculated based on the employee’s ordinary time earnings (OTE).
To date, there has been some confusion among employers as to whether annual leave loading is included in an employee’s OTE.
The ATO’s Superannuation Guarantee Ruling states that an annual leave loading that is payable under an award or industrial agreement is not regarded as OTE if it is “demonstrably referable to a notional loss of opportunity to work overtime.”
What this means is:
- If the purpose of the annual leave loading is to compensate for the loss of opportunity to work overtime – the loading will not be included in OTE and will not attract superannuation.
- If however, the purpose of the loading is something else – it will be regarded as OTE and will attract superannuation.
What is the purpose of annual leave loading?
Historically, annual leave loading was generally only payable in industries where employees regularly worked overtime and therefore the purpose of the loading was to compensate the employee for the lost opportunity to work overtime during their leave period.
Nowadays, annual leave loading is a common feature in most modern awards and industrial instruments irrespective of whether employees regularly work overtime.
The result is that the purpose of an annual leave loading is often unclear.
To date, many employers have relied upon the historical rationale behind annual leave loading (irrespective of whether or not their employees actually regularly work overtime) and therefore have not included annual leave loading payments when calculating superannuation.
In a recent statement, the ATO has stated that:
- “relying on historical opinions of the initial purpose of annual leave loading won’t be enough to demonstrate that annual leave loading is a lost opportunity to work overtime”; and
- employers will need written evidence to support the purpose of the annual leave loading if they intend not to include it as OTE.
What does this mean for employers?
The ATO’s statement puts employers on notice that, if they wish to continue a practice of not including annual leave loading in OTE calculations, they will need written evidence to demonstrate that the purpose of the loading is to compensate the employee for a loss of opportunity to work overtime.
The ATO suggests that satisfactory evidence could include:
- express wording in the relevant modern award or industrial instrument about the purpose of the loading; or
- other written evidence (such as a 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 the employer does not have or is not able to obtain written evidence of the purpose of the loading, then the loading must be included in OTE and will attract superannuation.
ATO compliance measures
In recognition of the historical uncertainty on this issue, the ATO has announced that for past quarters it will accept that the purpose of an annual leave loading was to compensate for the lost opportunity to work overtime (and therefore is not OTE) if:
- the employer reasonably self-assessed that the annual leave loading was not OTE on the basis that it was paid to compensate for lost overtime; and
- there is no evidence that suggests that the entitlement was for something other than overtime.
Going forward, however (from the April 2019 quarter), employers will need written evidence of the purpose of the loading if they do not intend to include it as OTE.
What do employers need to do?
Employers who do not currently include annual leave loading in OTE calculations should seek advice on whether or not their current practices are correct and what evidence they may be required to obtain for compliance purposes.
Please contact Kristin Ramsey – Practice Group Leader, Employment and Workplace Relations if your organisation needs assistance with this issue or any other employment or human resources matter.