The ATO has recently clarified its position on whether superannuation is payable on annual leave loading.
Annual leave loading is an additional payment of 17.5% (usually), provided to an employee on top of their base rate of pay, during periods of annual leave. It is mandated in some Awards, including the social and community SCHADS.
The background here could fill its own chronicle in the ATO annals (!) but in short, annual leave loading was originally included in Modern Awards to compensate employees, who would usually receive overtime and penalty rates, for the lost opportunity to work those hours during annual leave periods.
Due to the review of Modern Awards and enterprise bargaining, the entitlement was extended to employees that would not usually perform work paying overtime and penalty rates.
So what’s new?
Up to this point, there was much confusion around whether compulsory superannuation had to be paid in respect of annual leave loading. The ATO has now clarified its position that annual leave loading will be classified as ordinary time earnings (OTE), unless an employer can provide evidence to show that the entitlement is ‘demonstrably referable’ to an employee’s lost opportunity to work overtime.
Examples of this evidence include:
- If the wording in the relevant award or agreement clarifies the reason for the entitlement
- Any 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 have self-assessed on the basis that their annual leave loading is not OTE, and there is not enough evidence to demonstrate the purpose of the entitlement, there is a risk that they may have historical superannuation guarantee (SG) shortfalls and be liable for the SG charge.
What action needs to be taken?
The ATO has acknowledged the confusion around this topic, and the difficulties in identifying the purpose for annual leave loading entitlements. For this reason, the ATO will not apply compliance resources to scrutinise why annual leave loading was paid in previous 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
- There is no evidence 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
We would encourage our clients to check the ATO website for more information. The site includes helpful case studies that outline what organisations can do to clarify their position (for example, updating or creating organisational policy documents to include the reason for the entitlement).