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ATO updates requirements for superannuation on leave loading


In the absence of appropriately drafted policies or contracts of employment, aged care employers may be required to pay superannuation on annual leave loading, writes Grace Kim.

National system employment awards that affect the aged care industry contain provisions relating to annual leave loading, whereby an employee is entitled to receive a loading during a period of annual leave.

For example, the clause within the Aged Care Award 2010 provides that in addition to ordinary pay, an employee will be paid an annual leave loading of 17.5 per cent of their ordinary rate of pay.

Recently, the Australian Taxation Office released a guide that contains the view that superannuation is payable on annual leave loading if that payment is not for the loss of opportunity to earn overtime.

As a result, the ATO has stated the need for employers to establish written evidence through either contract of employment, enterprise agreement or company policy about the reason for such a payment.

Grace Kim

Although the relevant superannuation guarantee ruling of 2009 has not changed its definition of ordinary time earnings, the ATO has now stated employers may be required to prove why the loading is paid.

Up until now, they have not required employers to justify this, rather everyone but the ATO knew and understood the history of the entitlement.

It appears the ATO has not taken the legal history of annual leave loading into consideration when drafting that guide. Annual leave loading has been around at least since the 1960s and has been common across Australian businesses since the 1970s.

Annual leave loading was originally intended to ensure that employees were not financially disadvantaged during a period of annual leave. The loading was intended to compensate employees for their inability to earn overtime, penalties and other allowances while they were on annual leave.

Once again, Australian businesses have to navigate through a convergence of conflicting federal government agency views and determinations.

Requirements for compliance

However, while the ATO appears to be ignoring legal history they recognise “the evidentiary difficulties in identifying the purpose for annual leave loading entitlements” in the new guide.

It states that the scrutinising of compliance on this issue will not occur where an employer holds a reasonable position, and there is relevant evidence, which is less than five years old, that supports the position that the loading was for a “notional loss of opportunity to work overtime” or that there are no overtime earnings that suggests the entitlement was for something other than overtime.

Therefore, if employers do not have written evidence of the entitlement to annual leave loading as referrable to a lost opportunity to work overtime, the ATO expects employers to assess any future entitlement to fall within ordinary time earnings.

Businesses that pay employees an all-up rate of pay that incorporates annual leave loading (and other allowances and loadings) will likely be making superannuation contributions on that all-up rate already, unless otherwise identified. As a result, such businesses will likely not experience any change.

Going forward

Given the history of the issues generally, most businesses with award-covered employees already hold the “reasonable position” that annual leave loading is and was always paid to employees for the lost opportunity to work overtime during a period of annual leave.

That being said, we recommend some further entrenchment of that long-held view within your business. This may be undertaken by:

  • the interleaving of relevant statements into an annual leave policy within the business; or
  • a revision to future contracts of employment and particularly for award-covered employees, which states the purpose of the payment of annual leave loading.

Such simple steps will likely provide the appropriate evidence the ATO requires. As always, seek advice if you require more detailed assistance.

Access the guide here.

Grace Kim is workplace relations advisor at Workforce Guardian, a HR and employment relations service for employers.

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