Is annual leave loading subject to super?

by | May 10, 2019

A recent update to the ATO’s website regarding ordinary times earnings (OTE) and annual leave loading (from a superannuation guarantee (SG) perspective) has led to many employers wondering whether they have been adequately meeting their SG obligations, or whether they are at risk of being liable for the SG charge.

The ATO’s long standing position on whether annual leave loading (‘leave loading’) forms part of OTE (and, therefore, is potentially subject to SG) is reflected in SGR 2009/2 (SGR 2009/2 Superannuation Guarantee: meaning of the terms ‘ordinary times earnings’ and ‘salary or wages’).

SGR 2009/2 confirms the ATO’s view that leave loading will qualify as OTE (and, therefore, be subject to SG) unless it is referrable to a lost opportunity to work overtime, as follows:

‘238. 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’.’

The question of when this exception applies has led to considerable confusion for employers.

For example, in the circumstance where an employee is subject to an award that provides for leave loading, the award is unlikely to state the reason the entitlement exists. Similarly, for employees that receive leave loading outside of an award, the reason for payment of the loading may not be expressly confirmed.

Additionally, from an administrative perspective, employers may find it difficult to administer the payroll function where SG may potentially only apply to leave loading paid to certain classes of employees.

As a result, many employers have historically adopted a ‘holistic’ view that the rationale for payment of leave loading is the lost opportunity to work overtime across a leave period and, therefore, SG is not applicable (as the payments are not OTE).

Whether such rationale appropriately applies to a leave loading payment to a particular employee (or class employee) is the issue required to be determined.

For many employers, the ATO’s view as originally expressed in the now superseded SGR 94/4 ‘Superannuation Guarantee – Ordinary Times Earnings (SGR 2009/2 replaced SGR 94/4) had supported a ‘holistic’ treatment of leave loading as not being OTE. Specifically, paragraph 19 of that ruling took the view leave loading was paid in respect of employment, not ordinary hours of work and, therefore, was not OTE (unless the parties contracted otherwise).

However, the specific inclusion of paragraph 238 in SGR 2009/2 makes it clear that the ATO’s view changed such that a blanket rule does not apply to leave loading.

The recent changes to the ATO’s website resulted in the ATO acknowledging the difficulties in this area and, in effect, confirming that a blanket approach is not correct.

Of particular relevance are the changes made to the ATO’s website on 12 March 2019 (see QC58207 – Ordinary time earnings – annual leave loading). In updating its views (which haven’t essentially changed), the ATO has provided a concession to employers that may have historically taken the view their leave loading is not OTE, despite a lack of evidence to demonstrate the history/purpose of such entitlement.

As indicated above, employers in this category are potentially at risk of historical superannuation guarantee shortfalls and may be liable for the SG charge. However, in acknowledging the uncertainty and the difficulties regarding what evidence supports the purpose of leave loading entitlements, the ATO has advised:

“For this reason, we won’t apply compliance resources to scrutinising why annual leave loading was paid in historical quarters, where:

  • the employer self-assessed that the annual leave loading was not OTE, with the reasonable position that their annual leave loading was for a notional loss of opportunity to work overtime
  • there is no evidence that is less than five years old (the statutory period employers are expected to keep records relating to their SG affairs) that suggests the entitlement was for something other than overtime”.

However, the ATO confirms that going forward it has the following evidentiary requirements:

“As an entitlement to annual leave loading arises under an award or agreement, we would be satisfied that the entitlement is ‘demonstrably referrable’ to a lost opportunity to work overtime, if there is written evidence related to the entitlement.

This could be satisfied:

  • if the wording in the relevant instrument clarifies the reason for the entitlement
  • 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:

  • we would expect them to ensure they obtain it as soon as practicable, alternatively
  • assess their future entitlements on the basis that their annual leave loading falls within OTE.

Where employers have obtained this evidence as soon as practicable, we won’t apply compliance resources to scrutinising the purpose of the leave loading for quarters before they obtained the evidence”.


Following from the updates in guidance provided by the ATO, employers who are currently not recognising leave loading in OTE (and, therefore, have not been paying SG on these payments) should review the appropriateness of this treatment and take correct action, if required.

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.


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