The ATO has recently warned employers that it considers that annual leave loading should normally be part of ordinary time earnings (‘OTE’) for superannuation guarantee (‘SG’) purposes, unless it is referrable to a “lost opportunity to work overtime”.
Therefore, 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.
SGR 2009/2 states:
“By way of exception an annual leave loading that is payable under some awards and industrial agreements is not OTE if it is demostrably referable to a notional loss of opportunity to work overtime. However, the loading is always included in “salary or wages”.”
Most awards do not specifically state the reason the annual leave loading entitlement is provided.
Relying on historical opinions of the initial purpose of annual leave loading won’t be enough to demonstrate that annual leave loading is a lost opportunity to work overtime.
As an entitlement to annual leave loading arises under an award or agreement, the ATO would be satisfied that the entitlement is ‘demonstrably referrable’ to a lost opportunity to work overtime, if there is written evidence related to the entitlement.
This could be satisfied:
- if the wording in the relevant instrument clarifies the reason for the entitlement
- by 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 would expect them to ensure they obtain it as soon as practicable, alternatively
- assess their future entitlements on the basis that their annual leave loading falls within OTE (and therefore the super is payable).
Where employers have obtained this evidence as soon as practicable, the ATO won’t apply compliance resources to scrutinising the purpose of the leave loading for quarters before they obtained the evidence.
The ATO acknowledges the uncertainty around this topic, and the evidentiary difficulties in identifying the purpose for annual leave loading entitlements, and will apply a concessional compliance approach where certain requirements are met.
If this is a concern for your business, please contact our office and we can help with your SG obligations and (if necessary) determine whether you will be eligible for the ATO’s concessional compliance approach.
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