September 16, 2019   |   Tips

Superannuation on annual leave loading

Until recently, whether superannuation had to be paid in respect of annual leave loading was in all words; confusing. Thankfully, the ATO provided clarification in an announcement earlier this year.

Annual leave loading was initially incorporated into awards and industry agreements to compensate employees who usually received overtime and penalty rates for the shortfall in wages during periods of annual leave. Due to this interpretation, annual leave loading was not considered to be apart of ordinary time earnings (OTE)

Previously, many employers followed the ATO guidance and calculated their superannuation contributions for employees on the basis that annual leave loading was excluded from the definition of OTE.

What is the ATO’s stance on superannuation and annual leave loading?

As per the Superannuation Guarantee Ruling SGR 2009/2, it provides the ATO’s view that annual leave loading will be ordinary time earnings unless it is directly referable to a lost opportunity to work overtime.

ATO’s compliance approach to previous quarters

The ATO has acknowledged that there is uncertainty around the treatment of annual leave loading. In addition, modern awards and industry agreements generally do not state the reason for the annual leave loading payment being made to the employee.

As such, the ATO has stated that it won’t scrutinise the purpose of annual leave loading payments made in historical quarters where:

  • the employer self-assessed that annual leave loading payments were not ordinary time earnings because it was in relation to an employee’s loss of opportunity to work overtime; and
  • there is no evidence to suggest the entitlement was for something other than overtime.

The ATO states that relying on historical opinions about the initial purpose of annual leave loading will not be sufficient to demonstrate that the annual leave loading is now made for the lost opportunity to work overtime.

What do you need to do as an employer?

If your employees are entitled to annual leave loading, you will need to obtain written evidence demonstrating that the entitlement to annual leave leading is linked to an employee’s loss of opportunity to earn overtime and penalty rates. If you cannot obtain this evidence, the annual leave loading will form part of an employee’s ordinary time earnings, and superannuation contributions will have to be made in respect of those amounts.

For more information, visit the ATO website.