Until recently, whether compulsory superannuation had to be paid in respect of annual leave loading was a grey area. Finally, the ATO has now provided clarification in a recent announcement.
Annual leave loading is an entitlement contained in many awards and covers employees in industries such as building and construction, manufacturing, mining, horticultural, agricultural, hospitality, retail, administration, banking, finance, and insurance.
It is an additional payment of 17.5% (generally) provided to an employee on top of their base rate of pay during periods of annual leave. Annual leave loading was initially introduced to compensate employees who usually receive overtime and penalty rates during work periods for the shortfall in wages during periods of annual leave.
Prior to February 2018, many employers followed the ATO website and calculated their superannuation contributions for employees on the basis that annual leave loading was excluded from the definition of ‘ordinary time earnings’.
The ATO has now clarified its position that annual leave loading will be classified as ordinary time earnings, unless an employer can provide evidence to show that the entitlement to annual leave loading is referrable to an employee’s lost opportunity to work overtime.
On this basis, there is a risk that employers may be liable to a superannuation guarantee charge, as well as nominal interest, administrative fees, and penalties, for the underpaid superannuation contributions.
The ATO has acknowledged that they haven’t been consistent in this area. As such, the ATO has stated that it won’t scrutinise the purpose of annual leave loading payments made in historical quarters unless there was neglect shown by the employer.
Moving forward, for annual leave loading to be excluded from calculations of ordinary time earnings, employers must, as soon as practicable, obtain written evidence that the entitlement is ‘demonstrably referrable’ to a lost opportunity to work overtime.
Such evidence could include:
· wording in the relevant modern award or enterprise bargaining agreement clarifying the reason for the entitlement; or
· other written evidence, such as a documented policy, that clarifies the reason for the entitlement, and reflects the mutual understanding of both parties to the agreement that gives rise to the entitlement.
Employers need to check the awards covering their workforce and If your employees are entitled, they need to obtain written evidence demonstrating that the entitlement to annual leave leading is linked to an employee’s loss of opportunity to earn overtime and penalty rates. If the employer cannot obtain this evidence, the annual leave loading will form part of an employee’s ordinary time earnings, and superannuation contributions will have to made in respect of those amounts.
For more information on this development call the team at UHY Haines Norton on 4972 1300.