Evidentiary requirements for treatment of annual leave loading for super guarantee purposes

As an employer, you are required to provide a minimum level of superannuation support for each of your employees, calculated as a percentage of the employee’s ordinary time earnings.

The Australian Taxation Office (ATO) has recently stated that the ordinary time earnings calculation will be scrutinised going forward, as they understand that some employers are getting it wrong. In particular, errors are being made with respect to annual leave loading.

Annual leave loading is considered ordinary time earnings unless it directly relates to a lost opportunity to work overtime. This may be written in the employment or award agreement with your employees.

Relying on historical opinions of the initial purpose of annual leave loading will no longer be enough to demonstrate that annual leave loading is a lost opportunity to work overtime, rather than “ordinary time earnings”.

If you have not paid superannuation guarantee for annual leave loading, and you don’t have evidence to demonstrate the loading is for lost overtime, there is a risk that you have superannuation guarantee shortfalls and may be liable for the superannuation guarantee charge.

Going forward, you will need to demonstrate this evidence. If you are aware where you stand, we recommend the following:

  • review the applicable awards or industrial agreements for your staff to ascertain whether they specifically state the reason annual leave loading entitlement is provided, or
  • obtain written evidence such as a documented policy that clarifies the reason for the entitlement to annual leave loading.

These two methods will satisfy the ATO’s evidentiary requirements related to annual leave loading for future quarters.

Without this evidence, superannuation guarantee will be assessed on the basis that annual leave loading falls within ordinary time earnings, making you liable for 9.5% on the amounts. If you are unsure where you stand, and would like to discuss this matter further, please do not hesitate to contact us.

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