Edited version of administratively binding advice

Authorisation Number: 1012604893410

Advice

Subject: Superannuation Guarantee - Annual Leave Loading

Question

Do the annual leave loading payments provided for in the employer's enterprise agreement (the Agreement) form part of ordinary time earnings (OTE) for the purposes of subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Answer:

Yes, please see 'Explanation' below.

This advice applies for the following period:

For the period of operation of the Agreement.

Relevant facts and circumstances

Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.

• The employer recently implemented a new payroll, HR and finance system. As part of the system implementation a post implementation audit was undertaken of configuration of the system. The audit process identified that the treatment of the annual leave loading in the new system excluded the annual leave loading payments from the calculation of OTE for superannuation guarantee purposes.

• The majority of the employer's workforce work rostered hours. The rostered hours cover 24 hours per day / 7 days per week.

• The employer's staff members are eligible for overtime if they are required to work in excess of their ordinary rostered hours.

• The Agreement contains clauses that provide for the conditions of employment, the rates of pay, the wages composition including hourly rates and piece rates, allowances, superannuation, hours of work, overtime, meal breaks, leave arrangements and other matters.

Relevant legislative provisions

Subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992

Reasons for decision

Under the SGAA an employer must provide the required minimum level of superannuation support for its employees by the quarterly due date (unless the employees are exempt employees) or pay the superannuation guarantee charge. The minimum level of support is calculated by multiplying the charge percentage (currently 9.25%) by each employee's ordinary time earnings (OTE).

From 1 July 2008, an employer must use OTE as defined in subsection 6(1) of the SGAA as the earnings base to calculate the minimum superannuation contributions for their employees. This ensures that all employees are treated the same for superannuation purposes.

The Australian Taxation Office view on OTE in contained in Superannuation Guarantee Ruling SGR 2009/2 - Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2) which applies from 1 July 2009.

Paragraph 32 of this ruling states that subject to the exclusions mentioned in the Ruling, salary or wages that an employee receives, at or below his or her normal rate of pay for ordinary hours of work, in respect of periods of paid leave is simply a continuation of his or her ordinary time pay. It is OTE. It does not matter whether the entitlement to take the paid leave accrued gradually over time, arose in a specified circumstance or following a specified event, or was simply granted to the employee in the exercise of the employer's discretion.

However, the principle outlined in paragraph 32, does not extend to extra payments by way of 'leave loadings', and like payments, that are demonstrably referable to a notional loss of opportunity to work overtime, or similar.

Annual leave loading was introduced to the awards system in the 1970s on the basis that workers were entitled to loading because when workers were on holidays they received lower than normal pay, as their normal pay included overtime from extra shifts and weekends. Paragraph 25 of SGR 2009/2 provides that, generally, overtime is not ordinary hours of work and therefore not OTE. Therefore, annual leave loading as it is referrable to overtime hours of work is generally not considered part of OTE.

However, paragraph 238 of SGR 2009/2 states that:

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.

This paragraph in the explanation section of SGR2009/2 reflects the view in paragraph 32 which is in the binding section of the ruling. The purpose of this paragraph is to highlight the fact that the mere act of labelling a payment as "annual leave loading" would not in itself make that payment annual leave loading. The payment must have the fundamental qualities of an annual leave loading payment to be properly characterised as annual leave loading.

Application of the law to your circumstances

The Agreement provides for overtime to be paid for any hours worked in excess of the rostered ordinary hours on any day or shift. The ordinary hours of work are a maximum of 8 hours in any one day and additional hours at ordinary time rates can be worked through mutual agreement between the employer and employee provided the additional hours do not exceed 10 hours in any one day. The other overtime situation is where an employee who has worked as rostered on one day elects to return later in that day to work additional hours that have become available due to certain circumstances and in this case overtime is payable on the hours exceeding 8 hours per day. The employer's employees are eligible for overtime if they are required to work in excess of their ordinary hours.

Under the Agreement the employee may elect to take time off in lieu of payment for overtime provided there is mutual agreement between the employer and employee for this to occur. In this case no payment for overtime would be made.

Because overtime is not a standard part of the working arrangement for the employee, the annual leave loading cannot be regarded as compensation for the notional loss of the opportunity to work overtime. As per the Agreement, overtime would only occur in certain situations and not as part of the employee's ordinary working arrangement and it can be taken as either a monetary payment or time off in lieu.

In your case, the annual leave loading has no correlation to and is not demonstrably referable to a notional loss of opportunity to work overtime. Under the Agreement, an employee would still receive the annual leave loading regardless of whether they had worked overtime or not.

On the basis that annual leave loading is usually paid to compensate employees whilst on periods of leave because when workers were on holidays they received lower than normal pay, as their normal pay included loadings and allowances from working certain hours and weekends. The annual leave loading, in your case, is to compensate the employee for loadings and allowances that would be payable as part of their ordinary hours of work.

In conclusion, the annual leave loading paid to employees under the Agreement is OTE for the purposes of subsection 6(1) of the SGAA.

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