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  • Ordinary time earnings – annual leave loading

    Superannuation Guarantee Ruling SGR 2009/2 provides our view that annual leave loading will be ordinary time earnings (OTE) unless it is referable to a lost opportunity to work overtime:

    • 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 or wages'.

    We recognise that there has been uncertainty for employers in applying this view and determining if their annual leave loading is 'demonstrably referable'. Most awards do not specifically state the reason the annual leave loading entitlement is provided.

    Compliance approach to annual leave loading in previous quarters

    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 superannuation guarantee (SG) shortfalls and be liable for the SG charge.

    We acknowledge the uncertainty around this topic, and the evidentiary difficulties in identifying the purpose for annual leave loading entitlements. For this reason, we won't apply compliance resources to scrutinise why annual leave loading was paid in previous quarters, where:

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

    Disclosure of SG shortfalls to the ATO

    If employers determine that they have SG shortfalls for past quarters, (for example there is evidence to suggest their annual leave loading entitlement was for something other than overtime), they are required to lodge a Super Guarantee Charge (SGC) statement with us.

    We do not have any power to waive any of the components of the SGC, which also includes the interest component and administration charge. However, we do have discretion to partially or fully remit the additional 'Part 7 Penalty' that is imposed when there is a SG shortfall. As set out in Practice Statement PS LA 2011/28, we consider all factors and individual circumstances to determine the appropriate level of remission.

    The uncertainty and practical difficulties employers have faced in applying the Commissioner's view regarding annual leave loading are relevant factors for us to consider in determining the Part 7 penalty outcome. Additionally, as outlined in the Practice Statement, voluntary lodgment of SGC statements by an employer will be considered favourably when deciding to partially or fully remit the Part 7 penalty.

    Evidentiary requirements for future quarters

    As an entitlement to annual leave loading arises under an award or agreement, we would be satisfied that the entitlement is ‘demonstrably referable’ to a lost opportunity to work overtime, if there is written evidence related to the entitlement. Relying on historical opinions of the initial purpose of annual leave loading generally won't be enough to demonstrate that a specific annual leave loading entitlement relates to a lost opportunity to work overtime.

    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 then either:

    • we would expect them to ensure they obtain it as soon as practicable
    • they assess their future entitlements on the basis that their annual leave loading falls within OTE.

    Where employers have obtained this evidence as soon as practicable, we won't apply compliance resources to scrutinise the purpose of the leave loading for quarters before they obtained the evidence.

    Example 1:

    XYZ Co employs staff under and industrial agreement that includes an entitlement to annual leave loading at a flat rate. The industrial agreement is silent on the reason for the annual leave loading. These employees are also entitled to be paid overtime, but the industrial agreement does not have an explicit link between overtime and annual leave loading. There are no other entitlements in the industrial agreement that the annual leave loading is compensating.

    XYZ Co holds the position that the annual leave loading exists to compensate workers for the lost opportunity to work overtime, reflecting advice they have received on the historical reasons for their entitlement. XYZ Co prepares a policy document which clarifies the reason for the annual leave loading entitlement with the following paragraph:

    For the avoidance of any doubt, the entitlement to annual leave loading under clause X of [the industrial agreement] is provided to compensate staff for a lost opportunity to work overtime.

    As XYZ Co regularly deals with an employee representative union for its workers, they provide a copy of the policy document to the union to ensure that this clarification also reflects their understanding of the entitlement. XYZ Co self-assesses their SG obligations treating the annual leave loading as being outside OTE.

    End of example

    Example 2:

    QWERTY Co employs staff covered by a modern award. The award includes an entitlement to annual leave loading for day workers at a flat rate, and is silent on the reason for this entitlement. It also includes an entitlement to paid overtime, but does not include an explicit link between overtime and annual leave loading. There are no other entitlements in the award that state the annual leave loading is compensating.

    The award includes a different annual leave loading entitlement for shift workers, who are not entitled to paid overtime. The clauses suggest that this annual leave loading is paid to compensate a lost opportunity to earn shift allowances.

    QWERTY Co holds the position that the day workers' annual leave loading exists to compensate workers for the lost opportunity to work overtime, reflecting advice they have received on the historical reasons for their entitlement. QWERTY Co drafts a policy document which clarifies the reason for the award's annual leave loading entitlement with the following paragraph:

    This policy clarifies that, for staff covered by [the award], the entitlement to annual leave loading under clause X is compensating for the lost opportunity for overtime, except where [the award] indicates otherwise.

    All QWERTY Co policies are maintained on QWERTY Co's intranet. QWERTY Co employees have access to the intranet and relevant policies, and the policy includes a contact option if employees have any questions or issues concerning the policy. QWERTY Co self-assesses their SG obligations treating:

    • the annual leave loading for day workers as being outside OTE
    • the annual leave loading for shift workers as forming part of OTE.
    End of example
      Last modified: 06 Jun 2019QC 58207