Tax Insight: Annual leave loading & superannuation – ATO compliance approach

Key points

• If you have historically self-assessed that annual leave loading entitlements are not ordinary time earnings (OTE) and therefore have not been making superannuation contributions in respect of these entitlements, we highly recommend you review this;
• Review the relevant award that covers your employees and determine whether you have a historic tax exposure; and
• Going forward, determine if you have sufficient evidence in place for the purpose of self-assessing that annual leave loading is not OTE.

The ATO has recently published a public position on the superannuation treatment of annual leave loading entitlements as well as their ‘look forward’ compliance approach to the previous superannuation treatment of annual leave loading entitlements. Our Taxation Group has been provided with an insight into the anticipated public statement.

The issue

Historically employers have not made superannuation contributions in respect of annual leave loading entitlements on the basis that this was for the lost opportunity to work overtime and thereby not treated as OTE. At the start of this year payroll providers sent e-alerts to employers notifying of a ‘revised’ ATO position resulting in annual leave loading payments being treated as OTE and therefore subject to superannuation guarantee contributions.

The ATO’s position on leave loading has not changed since 2009 and the Commissioner’s view is outlined in SGR 2009/2: “annual leave loading that is payable under some awards and industrial agreements is not OTE if it is demonstrably referable to a notional loss of opportunity to work overtime. However, the loading is always included in ‘salary or wages’.”

In recent discussions with our Taxation Group, the ATO has acknowledged that their position is not sufficiently clear (in particular from an evidentiary stand point as to when something is “demonstrably referable”) and has been the result of some confusion. The ATO has recently published on their website a public position on this issue and also outline a “look forward” compliance approach (discussed below).

Drawing a line in the sand

Recognising the confusion on this issue, the ATO has agreed to not allocate any compliance resources to scrutinise the purpose for which annual leave loading was paid historically. Importantly, this is only where:

• The employer self-assessed that the annual leave loading was not OTE, with the reasonable position that their annual leave loading was for a notional loss of opportunity to work overtime; and
• There is no evidence that is less than 5 years old (the statutory period employers are expected to keep records relating to their superannuation guarantee affairs) that could suggest that the entitlement was for something other than overtime.

Recommended next steps

We recommend the following action items for all employers that have employees covered by an award:

1. Review your superannuation treatment of annual leave loading payments;
2. Review the applicable award for the purpose of determining whether there is historic evidence as to the purpose of annual leave loading entitlements paid; and
3. Self-assess the superannuation treatment of annual leave loading payments going forward and ensure there is sufficient evidence in place to support this position.

Please contact a member of our National Taxation Group for assistance in relation to the above.

This article was written by Nima Sedaghat, Partner.

Nima Sedaghat

P: +61 2 9334 8921

E: nsedaghat@hwle.com.au