Edited version of private advice

Authorisation Number: 1051608954300

Date of advice: 9 January 2020

Ruling

Subject: Annual leave loading

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

This advice applies for the following periods:

Year ended 30 June 2020

The arrangement commences on:

1 January 2020

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 paid to staff under the Award and the contract 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 and a contract. The Award and contract contain relevant information concerning the ordinary hours of work, shiftwork, allowances and penalties, overtime and annual leave loading.

Relevant legislative provisions

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

Reasons for decision

Summary

The Commissioner's view is that payments relating to employment will generally be OTE unless they can be characterised and subject to specific exclusion from the definition of OTE. There is no evidence to establish that the annual leave loading is 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) defines ordinary time earnings (OTE) as:

(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; ...

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, are not OTE.

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

Paragraph 32 in the Ruling section of SGR 2009/2 explains that:

...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...

In related commentary, the Commissioner at paragraph 35 offers the following view:

The principle in paragraph 32 of this Ruling 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.

In essence, the above views are consistent with what might be considered to be the 'default position' expressed in paragraph 25, being:

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 of employment generally and are not OTE because they are not in respect of any particular hours of work.

Where a payment of annual leave loading is demonstrably referable to a notional loss of opportunity to work overtime, that amount of such a payment does not form part of OTE. If the notional loss of opportunity cannot be demonstrated though, the amount of the payment does form part of OTE.

In providing guidance as to what might constitute an annual leave loading payment being demonstrably referable to a notional loss of opportunity to work overtime, the Commissioner has published material on the ATO website under the heading Ordinary time earnings - annual leave loading.

In terms of characterising a payment of annual leave loading, the commentary notes:

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.

That is to say, the wording of the relevant clauses the Award do not suggest that the applicable annual leave loading clause relates to overtime; and purely relying on historical opinions is insufficient to characterise the nature of a current annual leave loading entitlement as being demonstrably referrable to a notional loss of opportunity to work overtime or subject to any other provision excluding it from being OTE.

The Commissioner's view is that payments relating to employment will generally be OTE unless they can be characterised and subject to specific exclusion from the definition on OTE. Without specific wording to relate the annual leave loading to a loss of opportunity to work overtime, it cannot be excluded from OTE.

Therefore it is considered the total amount of annual leave loading payments paid under the Award will form part of the ordinary time earnings in relation to the employee.