Is superannuation payable on annual leave loading?
We all know that superannuation is payable on Ordinary Time Earnings (OTE). OTE is a narrower concept than ‘salary and wages’ and it includes earnings in respect of ordinary hours of work.
Annual leave payments are OTE even though the employee who receives them is technically not at work, because they are a continuation of ordinary pay during ordinary hours of work.
Some awards and industrial instruments draw a connection between annual leave loading and compensation for the lost opportunity to work overtime during a period of annual leave. Superannuation Guarantee Ruling 2009/2 allows annual leave loading to be excluded from OTE in these circumstances.
This might be news for many employers because historically there has been a connection between annual leave loading and lost overtime. Since overtime is not OTE, employers have taken the view that annual leave loading was not OTE either.
This month the ATO flagged the uncertainty around this topic and indicated it would not take compliance action with respect to historical superannuation guarantee shortfalls regarding annual leave loading where:
- the employer reasonably determined the loading was for a loss of opportunity to work overtime; and
- there’s no evidence the leave loading entitlement was for something other than overtime.
Some employers may not find that reassurance very reassuring.
A new approach
The ATO will be even tougher with respect to future quarters. Annual leave loading will be considered OTE (and therefore subject to superannuation) unless:
- the wording in an applicable industrial instrument indicates the loading is for a lost opportunity to work overtime (most don’t); or
- other written evidence (such as a policy) clarifies the reason for the entitlement and reflects the understanding of both parties.
Without this evidence, expect to either pay super on annual leave loading or risk liability for a superannuation guarantee charge.
For support with your organisation’s compliance measures, please contact Thea Birss by email (firstname.lastname@example.org) or mobile (0413 301 185).