A common question that we receive at ER Strategies is whether superannuation contributions need to apply to annual leave loading payments.
A statement of opinion from the Australian Taxation Office on 12 March 2019 has now provided some answers to the question. It should be noted that this is not a new interpretation (SGR 2009/2), however the ATO acknowledged uncertainty around the wording in the 2009 ruling depending on whether employers considered if annual leave loading was part of ordinary time earnings (‘OTE’), or if it was not considered as OTE if the leave loading was ‘demonstrably referable to a notional loss to the opportunity to work overtime’.
The ATO’s statement of opinion was provided to reduce this uncertainty moving forward.
The three key points that you need to know are:
- The ATO now requires written evidence that the annual leave loading is a payment which offsets the loss of opportunity for employees to work overtime for superannuation not to be payable on the loading;
- Where employers have obtained this evidence as soon as practicable and previously self-assessed that A.L.L. was not OTE based on a reasonable position that their annual leave loading was for a notional loss of opportunity to work overtime, but did not have written evidence before now, then the ATO will not investigate for past super payments;
- However, you will need to be able to point to written evidence from now on, otherwise super WILL apply to future annual leave loading payments.
What you need to do right now
If it is in your employee’s award, agreement or employment contract that annual leave loading applies due to the notional loss of an opportunity to work overtime, then this will likely satisfy the ATO as written evidence. However, the ATO notes that most awards do not contain such a statement.
In the absence of such a clear statement, then you will need some other written evidence that reflects a mutual understanding between the payer and payee as to why you pay annual leave loading, such as to offset the loss of an employee’s opportunity to work overtime.
Otherwise, the ATO will apply their compliance measures including the possibility of penalties and possible court action for the leave loading, if you fail to provide sufficient written evidence going forward.
What about super payments in historic periods
Although the ATO’s statement of opinion has stated that it will not proactively allocate compliance resources to examining earlier periods, employers are reminded that this does not eliminate the possibility of the ATO conducting an audit or investigation if a complaint or query is brought to the ATO. Employers should review whether SG has been paid on all annual leave payments over the past 5 years and assess this validity of this decision.
What is not made clear in the statement of opinion is how the penalty will be treated if an employer is audited or investigated by the ATO.
If you would like to read the ATO’s opinion on this matter, click this link.
If you have any further questions about your employment obligations, please contact ER Strategies on 1300 55 66 37.
Please note: this advice is general only; you will need to contact your taxation specialists or the ATO in regard to your specific situation, as we are unable to provide advice on taxation matters and we cannot be held responsible for any application issues relating to the above information.