Edited version of private advice

Authorisation Number: 1051527430338

Date of advice: 20 December 2019

Ruling

Subject: Annual leave loading and Superannuation Guarantee (Administration) Act 1992

Question 1

Does the entitlement to receive annual leave loading provided for in the Award form part of an employee's ordinary time earnings (OTE) for the purposes of subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Answer

Yes

Question 2

Does the entitlement to receive annual leave loading provided for in the Agreement form part of an employee's OTE for the purposes of subsection 6(1) of the SGAA?

Answer

Yes

This advice applies for the following periods:

Year ended 30 June 2020

The arrangement commences on:

1 July 2019

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.

We considered these to be relevant facts

You lodged a private ruling application requesting our advice as to whether annual leave loading and pay adjustments paid to staff employed under the Award to compensate for lost earnings due to being on leave are included in OTE.

You have advised that the Employer employs staff under the Award.

The Award contains relevant information concerning the ordinary hours of work, shiftwork allowances and penalties, overtime and annual leave loading.

You have advised that some of your employees were employed under an Agreement.

You supplied a copy of the Agreement.

The Agreement contains relevant information concerning the ordinary hours of work, shiftwork, allowances and penalties, overtime and annual leave loading

Relevant legislative provisions

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

Reasons for decision

Summary

As the payment of annual leave loading includes compensation for the loss of opportunity to receive all the allowances and penalty rates; there is no evidence to establish that some portion of the annual leave loading is compensation for loss of overtime and not the other allowances and penalty rates.

Hence it is considered that the annual leave loading is not demonstrably referable to a notional loss of opportunity to work overtime and as such, the annual leave loading forms part of OTE payable when an employee is on leave.

Detailed reasoning

Subsection 6(1) of the SGAA defines OTE in relation to an employee to mean:

((a) the total of:

(i) earnings in respect of ordinary hours of work other than earnings consisting of a lump sum payment of any of the following kinds made to the employee on the termination of his or her employment:

(A) a payment in lieu of unused sick leave;

(B) an unused annual leave payment, or unused long service leave payment, within the meaning of the Income Tax Assessment Act 1997; and

(ii) earnings consisting of over-award payments, shift-loading or commission; or

(b) if the total ascertained in accordance with paragraph (a) would be greater than the maximum contribution base for the quarter - the maximum contribution base.

In broad terms (and subject to some exceptions), OTE of an employee means earnings in respect of ordinary hours of work. Payments for work performed outside the ordinary hours of work, such as overtime payments or on-call allowances, are not OTE.

An employee's 'earnings', for the purpose of the definition of OTE, is the remuneration paid to the employee as a reward for the employee's services.

The Commissioner's views on OTE generally, including an employee's ordinary hours of work are included in Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2).

SGR 2009/2explains that an employee's 'ordinary hours of work' are the hours specified as ordinary hours of work under the relevant award or agreement that governs the employee's conditions of employment and highlights that any hours worked in excess of, or outside the span those specified ordinary hours of work are not part of the employee's 'ordinary hours of work'. In particular, the ruling states that:

25.  All amounts of earnings in respect of employment are in respect of the employee's ordinary hours of work unless they are remuneration for working overtime hours, or are otherwise referable only to overtime or to other hours that are not ordinary hours of work. There is no such thing as earnings that are merely in respect employment and are not OTE because they are not in respect of any particular hours of work.

An award or agreement may itself have a definition of 'ordinary time earnings' that purports to apply for superannuation purposes. However, the central question posed by the definition of OTE in the SGAA is what amounts are 'earnings in respect of ordinary hours of work'.

Paragraphs 35 and 238 of SGR 2009/2 states that annual leave loading is not OTE if it is demonstrably referable to a notional loss of opportunity to work overtime. However, these paragraphs were not intended to remove annual leave loading as OTE in all cases, but to restrict superannuation payable on annual leave loading where it is demonstrably related to the loss of overtime.

The introduction of annual leave loading into the awards system in the 1970s was to cover for the loss of additional earnings from the right to work overtime whilst employees where on leave. However, historical commentary indicates that this has not been the only reason for the inclusion.

Whilst the majority of annual leave loading clauses in the 1970s arose by consent, there is some commentary which suggests the reasons for inclusion of annual leave loading. In the Annual Leave Cases 1971 (1972) 144 CAR 528, the Conciliation and Arbitration Commission, when considering awarding extra payments above the base annual leave rate, observed:

"It was pointed out that many, probably the majority, of employees during their working year received more than their ordinary award rate each week while they are at work. They are paid over awards, shift allowances, special penalties, overtime and other amounts which give them a regular income over the award minimum, though it may well be an income which varies from time to time, even from week to week." (emphasis added)

Further, in its General Ruling (1973) AILR 694, the Queensland Industrial Relations Commission suggested a general framework for an annual leave loading that compensates for a range of payments above employees' base rates, not solely overtime:

"[A]wards and industrial agreements should in future provide that annual holiday pay should be calculated by adding:- (a) the appropriate award wage rate for ordinary hours worked; (b) any over-award payment payable as for ordinary hours of work; (c) shift work premiums including week-end penalty rates; (d) leading hands' (or similar) allowances (where applicable); and (e) any other payments which by the terms of the appropriate award or industrial agreement are payable for annual holiday purposes...in any case where the total payment so arrived at would not amount to the employee's ordinary wage rate for his ordinary hours of work...plus 17.5%, such employee should be paid in lieu thereof his ordinary wage rate...for the period of the annual holiday plus 17.5% thereof." (emphasis added)

While it is clear that the payment is to compensate employees, it is not clear to what extent it is solely for the loss opportunity for overtime. As additional entitlements such as allowances generally form part of OTE, (referred to as "OTE type allowances"), any leave loading compensating them would also form part of OTE.

Similarly additional payments also form part of OTE, where the payments are not related to earnings for work performed outside ordinary hours. Additionally, there is an indication that these other payments and allowances are not included in the ordinary payment an employee receives for annual leave. They are also not included in the ordinary pay that the annual leave loading is calculated on.

Therefore, as the OTE type allowances, additional payments and penalty rates form part of OTE and there is no evidence to establish what portion of the annual leave loading is compensation for loss of overtime and not the allowances or penalty rates it would be considered that the annual leave loading is not demonstrably referable to a notional loss of opportunity to work overtime. As such, the annual leave loading forms part of OTE payable when an employee is on leave.

In relation to the annual leave loading, both the Agreement and the Award state that an ordinary worker will be paid an annual leave loading of 17.5% of their ordinary pay.

There is no indication that these other payments and allowances are included in the ordinary payment an employee receives for annual leave. They are also not included in the ordinary pay that the annual leave loading is calculated on.

Therefore it is considered that by calculating the annual leave loading figure on the ordinary rate of pay, excluding any shift loadings, penalties or above award payments, this is representative of the fact that the annual leave loading is not referring to any overtime worked by the employees, but rather the ordinary pay received by the employee for their ordinary hours of work.

Moreover, a holistic analysis of leave loading entitlements reveals that the annual leave loading entitlements have also been provided to compensate for extra payments, including penalty rates, shift allowances and increase in remuneration due to performing work at a higher wage rate. Therefore, it is considered that the annual leave loading provisions do not solely relate to the loss of overtime and therefore form part of the ordinary time earnings of the employee.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).