Is Superannuation Payable On Annual Leave Loading?
In March 2019, the Australian Tax Office (ATO) clarified that superannuation is payable on annual leave loading. As usual with tax issues, it’s complicated.
According to the ATO, if leave loading is granted under a specific award or enterprise agreement and isn’t tied to a worker’s ability to work overtime, it’s classified as Ordinary Time Earnings (OTE) and, therefore, is subject to superannuation.
Executive Summary
● The ATO’s guidance categorises annual leave loading as part of OTE if granted under a specific award or enterprise agreement and not linked to the employee’s opportunity to
work overtime.
● Employers must clearly document the purpose of leave loading in employee contracts or agreements.
● Business owners must ensure superannuation is paid on annual leave loading unless it can be demonstrated that the loading compensates for lost overtime opportunities.
What is leave loading?
Key Features of the Leave Loading
● Percentage of Base Salary: Leave loading is typically calculated as a percentage of the employee’s base salary. A common rate in Australia, for instance, is 17.5%, but this can vary depending on the specific employment agreement or award.
● Purpose: The primary purpose of leave loading is to ensure that employees are not financially disadvantaged during their period of annual leave by compensating for potential lost opportunities to earn additional income through overtime or penalties.
● Applicability: Leave loading may be applicable to certain employees based on their employment contract, enterprise agreement, or the relevant industrial award. The specifics, including the rate of leave loading and the conditions under which it is paid, can vary widely.
Conditions and Considerations
● Superannuation Contributions: Whether superannuation contributions are payable on leave loading can depend on its classification as Ordinary Time Earnings (OTE). The Australian Taxation Office (ATO) has provided guidance indicating that leave loading should be included in superannuation calculations unless it can be demonstrated that the loading compensates for lost overtime opportunities.
● Documentation: For employers, it’s crucial to clearly document the purpose of leave loading in employment contracts or agreements. This documentation is essential to justify the treatment of leave loading for superannuation purposes and to ensure compliance with regulatory requirements.
Example
Simon works 8 hours daily from Tuesday to Saturday, totalling 25 hours weekly. His minimum hourly rate is $20 per hour with a 25% weekend penalty on Saturday, leading to a Saturday pay rate of $25 per hour.
Simon takes one week of annual leave. For this week, he’ll be paid the higher of these two options:
● his minimum weekly rate plus 17.5% leave loading, or
● his minimum weekly rate plus weekend penalties.
Minimum weekly pay without weekend penalties
25 hours x $20 = $500
Minimum weekly pay plus leave loading
$500 + 17.5% = $587.50
Minimum weekly pay plus weekend penalties
20 hours x $20 = $400
5 hours x $25 = $125
= $525
Simon’s minimum weekly pay plus leave loading exceeds his minimum weekly pay plus weekend penalties; therefore, he gets paid $587.50 for his annual leave.
Exemptions from superannuation on annual leave loading
If you can demonstrate that the annual leave loading is compensation for a missed opportunity to earn overtime, it’s excluded from OTE and isn’t subject to superannuation. So, if an employee’s contract explicitly states that the leave loading is for lost overtime opportunities, it won’t attract superannuation.
How to avoid superannuation compliance issues
The ATO’s clarification highlights the need for transparency and compliance in our financial practices. It presents both a challenge and an opportunity for us to review our payroll systems and ensure we’re correctly accounting for superannuation on leave loading.
#1. Clearly define your reason for leave loading
To avoid disputes, ensure the reason for leave loading is explicitly defined in employee contracts or enterprise agreements. If the ATO questions your superannuation payments, having this evidence can support your claim that the leave loading is or isn’t tied to overtime work.
#2. Provide evidence for paid annual leave loading
Sufficient evidence must be provided to the ATO showing your annual leave loading policy. This evidence includes:
● The appropriate employee agreement or award
● A documented policy stating the reason for the annual leave loading entitlement
#3. Correctly exclude annual leave loading from an employee’s OTE
If you wish to exclude annual leave loading from an employee’s OTE, you need written evidence showing that the leave loading compensates for lost overtime opportunities. This evidence can be the relevant employment agreement or a documented policy that both you and your employees understand.
If you don’t have this evidence, obtain it as soon as possible or start including annual leave loading in your employees’ OTE when calculating their super guarantee payments.
Impacts on annual leave pay for the Road Transport Industry
This clarification has significant implications for the Road Transport Industry, where it’s common for workers to receive leave loading as part of their compensation. For instance, under the Road Transport and Distribution Award 2020, workers are entitled to an annual leave loading of 17.5 per cent.
Before the ATO’s clarification, there was some uncertainty about whether this was considered OTE, but now we know if the leave loading isn’t directly linked to lost overtime opportunities, superannuation must be paid on it.
Annual leave loading checklist
- Review Employment Contracts and Awards
Action: Examine all employment contracts and industrial awards applicable to your employees.
Purpose: Identify the terms regarding holiday leave loading to understand if it’s considered Ordinary Time Earnings (OTE) for each employee. - Understand ATO Guidelines
Action: Familiarise yourself with the Australian Taxation Office (ATO) guidelines on superannuation contributions for leave loading.
Purpose: Ensure your interpretation of leave loading as part of OTE align with ATO’s stance. - Document the Purpose of Leave Loading
Action: Clearly document the purpose of leave loading in employment contracts or enterprise agreements.
Purpose: Have written evidence that specifies whether leave loading compensates for lost overtime opportunities, which affects its treatment as OTE. - Update Payroll Systems
Action: Adjust your payroll system to include leave loading in the superannuation calculations where applicable.
Purpose: Ensure automatic and accurate calculation of superannuation contributions on leave loading. - Train HR and Payroll Staff
Action: Provide training or informational sessions for your HR and payroll staff regarding the correct treatment of leave loading for superannuation purposes.
Purpose: Promote awareness and understanding within your team to prevent errors in superannuation calculations. - Conduct Regular Audits
Action: Periodically audit your payroll processes to ensure compliance with superannuation contributions on leave loading.
Purpose: Identify and correct any discrepancies or errors in a timely manner to avoid penalties. - Seek Professional Advice
Action: Consult with a financial advisor or accountant specialising in Australian superannuation laws.
Purpose: Gain expert advice tailored to your business’s specific situation, ensuring compliance with legal requirements. - Communicate with Employees
Action: Inform your employees about how leave loading is treated for superannuation purposes within your organisation.
Purpose: Maintain transparency and address any concerns or questions from employees regarding their superannuation entitlements. - Stay Updated on Legislation
Action: Regularly check for updates or changes in legislation regarding superannuation contributions and leave loading.
Purpose: Ensure your practices remain compliant with the latest legal requirements. - Prepare for ATO Queries
Action: Organise and maintain detailed records concerning leave loading payments and superannuation contributions.
Purpose: Be prepared to provide evidence to the ATO in case of audits or queries regarding your superannuation practices.
Need help with superannuation for your Road Transport business?
Super, wages and leave can be complicated. If you’re unsure about your superannuation requirements, applicable annual leave loading, minimum weekly pay, leave loading payment requirements or any other matters related to running your business, we’re here to help.
NatRoad Members receive free access to advice on superannuation matters along with a wide range of resources for running your Road Transport business. Become a NatRoad Member.
Speak to a NatRoad advisor on 1800 272 144 or email [email protected].
