ATO confirms the superannuation guarantee status in regards to annual leave loading

Daniel Butler ([email protected]), Director, DBA Lawyers

On 12 March 2019 the Australian Taxation Office (‘ATO’) updated their website to clarify its approach to dealing with the application of annual leave loading (‘AL loading’) for the purposes of the superannuation guarantee (‘SG’) regime.

1 SG and ordinary time earnings (‘OTE’)

Superannuation is broadly payable on an employee’s OTE which generally includes remuneration paid to an employee in relation to their ordinary hours of work. However, when it comes to overtime, employers are generally not required to pay SG on payments which are referable to overtime worked by an employee.

An important question that then arises is whether employers would have to pay SG on AL loading that relates to lost opportunity to work overtime.

2 Uncertainty around this topic

In the updated webpage, the ATO acknowledge the uncertainty around how SG applies to AL loading. Indeed employers have experienced considerable difficulty in figuring out and demonstrating whether certain past payments of AL loading are considered OTE for SG purposes. Naturally, employers wrestling with this would have concerns that they have substantial exposure for failing to meet their SG obligations.

3 The ATO’s compliance approach

3.1 Previous periods

In response to this potential past uncertainty, the ATO has announced that it will not apply compliance resources to scrutinising why AL loading was paid in previous quarters, where:

(a)   there was a reasonable position that the AL loading was for a notional loss of opportunity to work overtime; and

(b)   there is no evidence in the preceding five years from the relevant period that suggests the entitlement was for something other than overtime.

It should be noted that on the ATO’s updated webpage, the ATO remarked that relying on historical opinions of the initial purpose of AL loading is not enough to demonstrate that AL loading is a lost opportunity to work overtime.

3.2 Prospective approach

The update is broadly consistent with the ATO’s views expressed in Superannuation Guarantee Ruling SGR 2009/2, particularly in paragraph 238 (emphasis added):

By way of exception an 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’.

Accordingly, the ATO has advised that going forward, it will be satisfied that the entitlement to AL loading is ‘demonstrably referrable’ to a lost opportunity to work overtime if:

(a)   there is wording in the relevant instrument or other written evidence (eg, a documented policy) that clarifies the reason for the entitlement; or

(b)   there is other written evidence (eg, a 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.

Where employers do not have this evidence the ATO will require that they obtain such evidence as soon as practicable or otherwise assess the relevant AL loading entitlements on the basis that they fall within OTE. The ATO confirms that where evidence is obtained as soon as practicable it will not apply compliance resources to scrutinising the purpose of the AL loading for quarters before the evidence was obtained.

Naturally, employers that do not heed the above criteria risk the imposition of SG charge liabilities, lost deductibility of SG charge payments and various other penalties. For completeness we note that recently introduced SG integrity measures have been passed as law and employers are now also exposed to the risk of imprisonment in certain circumstances.

4 Practical tips

The ATO’s update has provided employers with practical steps that can be taken to minimise risk.

4.1 To address the past review your position and check documents

For previous periods, employers can check to see whether SG has been paid on AL loading payments over the past five years. Where SG has not been paid, the employer will need to ascertain whether there is a reasonable basis for a position that the entitlement was for a notional loss of opportunity to work overtime and whether there are any relevant documents that support or contradict the employer’s position.

4.2 Going forward update your documents

Prospectively employers should carefully consider and document their position on the treatment of AL loading payments by updating their policies, agreements and related arrangements. Unless the employer has appropriate evidence as discussed under heading 3 above, they will be exposed to substantial risk especially as the ATO stated on 12 March 2019 that AL loading should be treated as OTE and be subject to the relevant SG obligations.

5  Conclusion

Employers should review their last five years AL loading treatment for SG purposes and review their current documents and make appropriate adjustments to ensure compliance with their SG obligations. Naturally, DBA Lawyers would be pleased to assist, if requested.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Note: DBA Lawyers hold SMSFCPD training at venues all around Australia and online. For more details or to register, visit www.dbanetwork.com.au or call Marie on 03 9092 9400.