ATO clarifies its position on superannuation and annual leave loading

There has been much talk in recent months regarding the payment of superannuation on annual leave loading. Until early this year it was common for employers not to make superannuation payments on annual leave loading.

Ordinarily, superannuation is payable with respect to ordinary time earnings (OTE), that is clear. What is unclear however, is whether annual leave loading constitutes OTE.

The ATO has recently clarified that superannuation may be payable on annual leave loading.

Where does annual leave loading come from?

Annual leave loading is an entitlement which contained in most industrial instruments. This could be a Modern Award or Enterprise Agreement.

Annual leave loading is generally an additional payment of 17.5% provided to an employee on top of their base rate of pay during periods of annual leave. Annual leave loading was initially incorporated into modern awards to compensate employees who typically receive overtime and penalty rates during work periods for the shortfall in wages during periods of annual leave.

Through the review of modern awards and enterprise bargaining, the entitlement to annual leave loading has been extended to classifications of employees that would not generally perform work attracting overtime and penalty rates.

In determining whether annual leave loading constitutes OTE, you must consider where the entitlement to annual leave loading comes from and its purpose.

So is superannuation payable to my employees?

Unless the industrial instrument which applies to your employees specifically states annual leave loading is provided to compensate an employee for the lost opportunity to work and be paid for overtime, it is likely that superannuation is payable on annual leave loading.

What should I do?

Employers should take the following steps to ensure that they are complying with their superannuation obligations:

  1. Review the industrial instrument your employees are covered by – this might be a Modern Award, Enterprise Agreement or Contract. Where there is an entitlement to annual leave loading, test whether the instrument expressly provides that annual leave loading is for the purpose of compensating employees for lost overtime. It is unlikely you will find this explicit phrasing, however you may be required to look back to Pre-Reform Awards, those that existed before Modern Awards commenced, to determine where the entitlement for annual leave loading was established.
  2. Review your current payroll practices – up until the ATO’s clarification earlier this year, it was a common understanding that superannuation was not payable on annual leave loading and it is possible that is how your payroll practices are currently set up.
  3. Revise your payroll practices if necessary – given the ambiguity and the lack of clarification by the ATO, until now, it will be more important to focus on your practices moving forward and if required, amend your payroll systems to enable payment of superannuation on annual leave loading.

How we can help

If you need assistance in determining whether the industrial instrument covering your employees entitles them to annual leave loading in compensation for the lost opportunity to work overtime, please do not hesitate to contact us.

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