The Australian Taxation Office (ATO) has provided clarification on whether or not compulsory superannuation is required to be paid on annual leave loading.

Background:

Annual leave loading (usually 17.5%) is an entitlement paid to employees who usually receive overtime or penalty rates as compensation for the loss of wages during annual leave periods.

When Superannuation Guarantee (SG) was introduced, ATO guidance stated that annual leave loading was not ordinary time earnings (OTE) and was not subject to SG.

The ATO has now clarified its position on annual leave loading

In Superannuation Guarantee Ruling SGR 2009/2, the ATO adopted the view that the only time leave loading can be excluded from SG calculations is where it can be demonstrated that leave loading is specifically being paid in circumstances of lost overtime or penalty rates while an employee is on leave.

In all other circumstances, leave loading is required to be classified as ordinary time earnings and as such is subject to SG.

What do employers need to do?

The ATO has recently increased its focus on SG with added investigation and enforcement resources.  Therefore, employers increasingly need to be able to demonstrate the SG position they are taking is correct.

Employers should pay SG on annual leave loading unless their industrial instrument (modern award, employment contract, or enterprise bargaining agreement) expressly says that the loading is for the lost opportunity to work overtime or receive leave loading during periods of annual leave, or there is other written evidence of a mutual understanding by the parties to that same effect.

Other written evidence may include a documented policy that clarifies the reason for the entitlement, and reflects the mutual understanding of both parties of such agreement.

Should you discover an SG underpayment issue, we recommend early consultation with your tax advisor for advice on rectifying the underpayment.

Further guidance

The ATO website provides a checklist to help you identify what payments are considered part of ordinary time earnings for superannuation guarantee purposes.

In addition, should you have any questions regarding your SG obligations, or would like to discuss this article further, feel free to contact a Hall Browns advisor on 07 3831 1055 or at mail@hallbrowns.com.

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