Superannuation shortfall from annual leave loading confusion

The Australian Taxation Office (ATO) has historically held the view that annual leave loading was not earnings in respect of ordinary hours of work, or ordinary time earnings (OTE). This meant superannuation was not payable in respect of such earnings.

This position has since changed and the view is now that annual leave loading will be OTE, thus superannuation is now required to be paid on these earnings. The exception to this is that under some awards and industrial agreements annual leave loading is not OTE if it is demonstrable referable to a notional loss of opportunity to work overtime.

The ATO has recognised that there has been uncertainty for employers in applying this view and determining if their annual leave loading is ‘demonstrably referable’ as most industry awards do not specifically state the reason the annual leave loading entitlement is provided.

If employers have self-assessed on the basis that their annual leave loading is not OTE, and there is a lack of evidence to demonstrate the purpose of the entitlement, there is a risk that they may have historical superannuation guarantee (SG) shortfalls and therefore be liable for the SG charge.

It has recently been noticed that many companies are paying annual leave loading without paying superannuation on it, due to treating it as an allowance. As a result of this, a long line of prominent Australian retailers have come under scrutiny for underpaying their employees, in the form of superannuation.

The Government recently proposed a superannuation amnesty that would provide relief to underpaying employers by encouraging them to come clean on unpaid superannuation and avoid some of the penalties, however, it failed to be legislated.

Due to opposition by Labor and the crossbenchers, the ATO confirmed that until the law was passed it would “continue to apply the existing law to the superannuation guarantee statements you lodge”, including the superannuation guarantee charge.

As of this month, the ATO will start approaching thousands of businesses about late or unpaid superannuation payments as it starts to use its unprecedented access to company data through single touch payroll systems. Due to this access, there is expected to be more transparency on superannuation and non-compliance will be much easier to be seen than it was in the past.

Eloise Wallis, AFS Accountant

If you pay annual leave loading but don’t pay superannuation on it, there is a chance that you are at risk of having underpaid your employees. For assistance on clarifying if superannuation should be paid on leave loading under your specific industry award, please give us a call on 03 5443 0344.