New developments with ordinary time earnings and annual leave loading

The ATO recently issued an update on the Commissioner of Taxation’s (Commissioner) position in respect of ordinary time earnings (OTE) and annual leave loading.

Based on the definition in the Superannuation Guarantee (Administration) Act 1992 (SGAA), OTE is generally defined as payments to the employee in respect of ordinary hours of work and excluding any lump sum payments made to the employee on termination of employment, such as payment of unused sick leave, unused annual leave and long service leave. In addition, OTE specifically includes over-award payments, shift loading and commission.

SGR 2009/2 provides the Commissioner’s position in respect of what components make up OTE.

Under a number of industrial awards and enterprise bargaining agreements, employees may be entitled to annual leave loading as compensation for working on weekends and/or public holidays. Regarding the payment of annual leave loading in these circumstances, the ATO has advised the payment must be ‘demonstrably referable’ to a notional loss of opportunity to work overtime, or similar.

The ATO has acknowledged there has been uncertainty in determining if annual leave loading is 'demonstrably referable' to a notional loss of opportunity to work overtime. Generally, industrial awards and EBAs do not specifically state the reason the annual leave loading entitlement is provided.

Action Required

Where there is a lack of evidence to demonstrate the purpose of the entitlement, there is a risk there may be a historical superannuation guarantee (SG) shortfall and employers may be liable for the SG charge.

The ATO has advised it would be satisfied that the entitlement is ‘demonstrably referable’ to a lost opportunity to work overtime, where there is written evidence related to the entitlement. This could be satisfied:

a) if the wording in the relevant award/EBA clarifies the reason for the entitlement; or

b) by other written evidence (for example, 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.

If employers do not have this evidence the ATO guidance indicates employers should assess their future entitlements on the basis that their annual leave loading falls within OTE and SG is therefore payable.

Where employers have obtained this evidence as soon as practicable, the ATO has advised that it won’t apply compliance resources to scrutinise the purpose of the leave loading for quarters before employers obtained the evidence.

If you require more assistance with these matters, contact the Findex Tax team.