Annual Leave Loading: Updates You Need to Know
Does your business or organisation make annual leave loading payments to employees? If so, the business or organisation may have a legal obligation to make superannuation contributions in respect of those payments if it has not already been making such contributions.
This follows a recent important update from the ATO regarding its position with respect to whether superannuation contributions are payable on annual leave loading payments.
Under the applicable superannuation legislation, employers have a legal obligation to make superannuation contributions on behalf of their eligible employees calculated as a specified rate (currently 9.5%) of their “ordinary time earnings” (OTE).
Put simply, OTE is defined as an employee’s total earnings in respect of ordinary hours of work. It includes, but is not limited to, an employee’s salary or wages, annual leave, sick/personal leave, commissions, and payments in lieu of notice, but excludes overtime payments.
Until relatively recently, there has been a level of uncertainty around whether annual leave loading falls within the definition of OTE.
However, earlier this year the ATO clarified its position. In particular, the ATO advised that annual leave loading will constitute OTE, unless an employer can provide evidence that the entitlement to annual leave loading is referrable to an employee’s lost opportunity to work overtime. The evidence can include specific wording in a modern award, enterprise agreement, employment agreement or company policy, which clarifies the reason for the entitlement to annual leave loading.
Employers who simply assume that annual leave loading is paid to compensate employees for loss of overtime whilst on leave and do not have evidence supporting this assumption are at risk of having superannuation guarantee shortfalls and may be liable to pay a superannuation guarantee charge.
Martin Alden, Partner – Employment and Industrial Relations