Superannuation payable on leave loading unless proved otherwise

A ruling by the Australian Tax Office (ATO) on 12 March 2019 highlights the need for employers to ensure they confirm the reason for payment of annual leave loading with employees.

The Superannuation Guarantee (Administration) Act 1992 requires employers to make superannuation contributions to employees based on their ‘ordinary time earnings.’

While the ATO has not historically considered annual leave loading as ‘ordinary time earnings’, the ATO’s 12 March 2019 ruling suggests employers must have evidence that annual leave loading is compensation for the lost opportunity to work overtime, for superannuation to not be payable on the amount.

The ATO has also confirmed that “relying on historical opinion of the initial purpose of annual leave loading generally won’t be enough to demonstrate that a specific annual leave loading entitlement relates to a lost opportunity to work overtime.”

Where employers have obtained evidence as soon as practicable, the ATO has announced it will not apply compliance resources to scrutinise the purpose of the leave loading for quarters before that evidence was obtained.

Recommendations for employers

As industrial instruments rarely specify the purpose of annual leave loading, employers are encouraged to review applicable modern awards and enterprise agreements and provide written notification to employees to clearly establish the purpose of the payment is compensation for the lost opportunity to work overtime.

If in doubt, employers should seek legal advice for clarification.