Are you paying Super on annual leave loading?

On 12 March 2019, the Australian Taxation Office (ATO) issued a note clarifying its view as to whether annual leave loading attracts Superannuation Guarantee (SG) contributions. This depends on whether leave loading is ordinary time earnings (OTE). Annual leave loading will be OTE unless it is referrable to a lost opportunity to work overtime. 

The commonly held view is that annual leave loading is not OTE because its initial purpose was to compensate workers for the lost opportunity to work overtime when annual leave is taken. However, most Awards, including the Electrical, Electronic and Communications Contracting Award 2010, do not specifically state the reason the annual leave loading entitlement is provided and 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.

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 acknowledged the uncertainty around this topic, and the difficulties employers face in identifying the purpose for annual leave loading entitlements. 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 (five years being the statutory period employers are expected to keep records relating to their SG affairs) that suggests the entitlement was for something other than overtime.

Employers 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 obtain it as soon as practicable, or alternatively assess their future entitlements on the basis that their annual leave loading falls within OTE.

All electrical contractors are urged to attend to this asap. Click here to view the ATO’s note on their website.

If you have any questions about this issue, please contact NECA Legal on (08) 6241 6100.