In welcome news to employers, the ATO has recently clarified its position on annual leave loading for superannuation purposes and has sought to end years of concern and uncertainty following a major tax ruling in 2009.
Under superannuation guarantee legislation, compulsory superannuation contributions are payable on an employee’s Ordinary Time Earnings (OTE) and it has long been settled that payments made in respect of overtime do not form part of an employee’s OTE.
In Tax Ruling SGR2009/2 the ATO:
- clarified the meaning of ‘ordinary time earnings’ and detailed the types of payments and benefits that made up an employee’s OTE
- stated annual leave loading forms part of an employee’s OTE and is therefore subject to superannuation contributions unless the loading is ‘demonstrably referable’ to a lost opportunity to work overtime
The Tax Ruling resulted in substantial confusion amongst employers since the historical purpose of annual leave loading was to compensate employees for the loss of opportunity to receive overtime and other variable benefits during a period of annual leave.
More concerning, the Tax Ruling effectively exposed many employers to substantial superannuation shortfalls and back-pay claims.
The ATO has belatedly recognised this concern and has announced that it will not apply ‘compliance resources’ to scrutinise why annual leave loading was paid in previous tax quarters where:
- an employer has self-assessed that annual leave loading was not ordinary time earnings, with the reasonable position that the loading was for a notional loss of opportunity to work overtime; and
- there is no evidence less than five years old that suggests the entitlement was for something other than overtime.
However, the ATO has also make clear that, moving forward, employers must obtain specific evidence which clearly identifies that annual leave loading payments are paid in satisfaction of an employee’s lost overtime opportunities.
Such evidence could take the form of a provision within an enterprise agreement, employment agreement, letter of appointment or other employment policy, which states (to the effect of):
“the employer and the employee understand that the payment of annual leave loading is intended to compensate the employee for a lost opportunity to work overtime”
Since most modern awards do not specifically state that annual leave loading is intended to compensate an employee for the lost opportunity to work overtime, relying on historical opinions of the initial purpose of annual leave loading will likely be insufficient evidence to satisfy the ATO.
If an employer does not have this evidence, the employer:
- would be expected to obtain it as soon as practicable; or
- would be required to assess future employee entitlements on the basis that annual leave loading constitutes OTE (and is thus subject to superannuation contributions).
Where employers have obtained this evidence as soon as practicable, the ATO have indicated they will not scrutinise the purpose of leave loading for quarters before they obtained the evidence ie, it can be used as evidence of the employer’s historical understandings and intentions.
If an employer determines it has superannuation guarantee shortfalls for past tax quarters (eg, where there is evidence to suggest the annual leave loading entitlement was for something other than overtime), the employer is required to lodge a Superannuation Guarantee Charge statement with the ATO.
Although the ATO cannot waive a superannuation guarantee charge, prompt disclosure and reporting may result in the ATO remitting part or all of any additional penalties payable for superannuation shortfalls.
Given the additional clarity provided by the ATO’s announcement, employers must:
- review the terms of any modern award, enterprise agreement or other industrial instrument that covers their employees
- obtain evidence supporting the required understanding as soon as possible
- update their employment agreements, letters of appointment and workplace policies to make clear the purpose of any annual leave loading payable
- report to the ATO any recognised superannuation shortfalls for previous tax quarters
- seek professional legal and accounting advice in relation to these matters
Please call the leading employment lawyers in Parramatta, the Matthews Folbigg Workplace Solutions employment law team on 9635 7966 to speak with one of our employment lawyers if you require any assistance or advice.