A common question that we receive at ER Strategies is whether superannuation contributions need to apply to annual leave loading payments. Annual leave loading was originally introduced into awards in the 1970s on the basis that it compensated employees for the lost opportunity to work overtime when they were on annual leave and thereby earn extra income.
A recent statement of opinion from the Australian Taxation Office on 12 March 2019 has now provided some answers to the question.
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.
- Due to a lack of clarity around the issue, if you 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 penalties and possible court action for the leave loading if you fail to provide sufficient written evidence going forward.
If you would like to read the ATO’s opinion on this matter, click this link.