The issue of SG on leave loading has arisen from a recent update to the ATO website in March to align the view (adopted in in its Superannuation Guarantee Ruling SGR 2009/2) that annual leave loading will be ordinary times earnings (OTE) unless it is referable to a lost opportunity to work overtime. The website also clearly states that all other annual leave loading is OTE and therefore subject to SG.

The Ruling states at paragraph 238:

“By way of exception an annual leave loading that is payable under some awards and industrial agreements is not OTE if it is demonstrably referable to a notional loss of opportunity to work overtime.  However, the loading is always included in ‘salary and wages’”.

We understand that most awards do not specifically state the reason the annual leave loading entitlement is provided. As such, from a review or assessment perspective, whether or not leave loading is OTE and therefore subject to SG depends (in our view) on the wording of the contracts, Awards and/or Enterprise Agreements covering the employee(s).

The ATO maintains that employers cannot rely on historical opinions of the initial purpose of annual leave loading to demonstrate that annual leave loading is a lost opportunity to work overtime.  However, where the entitlement to leave loading arises under an award or agreement, the ATO will be satisfied that the entitlement is “demonstrably referable” to a lost opportunity to work overtime if there is written evidence related to the entitlement, such as:

  • if the wording of the relevant instrument clarifies the reason for the entitlement; or
  • by other written evidence (e.g. documented policy) that clarifies the reason for the entitlement and reflects the mutual understanding both parties to the agreement that gives rise to the entitlement.

If an employer does not have this evidence, the ATO expects employers to ensure they obtain it as soon as is practicable. Alternatively, the ATO requires employers to assess their future entitlements on the basis that their annual leave loading falls within OTE and is subject to SG If employers obtain the required evidence as soon as is practicable, the ATO will not apply compliance resources to scrutinising the purpose of the leave loading for quarters before they have obtained the evidence.

As there is a lot of uncertainty around this topic and the evidentiary difficulties in identifying the purpose for annual leave loading, the ATO will not apply compliance resources to previous quarters where:

  • the employer self-assessed that annual leave loading was not OTE, with the reasonable position that their annual leave loading was for the notional loss of opportunity to work overtime; and
  • there is no evidence that there is less than 5 years old (which is the statutory period employers should keep records relating to their SG affairs) that suggests the entitlement was for something other than overtime.

We think the starting point to assess any SG shortfalls on this matter would be reviewing awards/agreements and what other evidence to support a position taken as to whether the leave loading is or is not subject to SG. We note also the higher policing of SG by the ATO and the introduction of single touch payroll (STP) places a greater need for care and clarity by employers.