Earlier this year the ATO revised their position surrounding superannuation payable on annual leave loading but it still has employers scratching their heads on the matter. We summarise some of the key points on this topic.
What is Leave Loading?
Essentially, leave loading is a payment made on top of the employee’s base rate of pay for usual hours worked. It is equivalent to 17.5 percent of a week’s wage.
It is an entitlement contained within most modern awards and covers employees in industries such as building and construction, manufacturing, mining, horticultural, agricultural, hospitality, retail, administration, banking, finance, and insurance.
Any employee who is covered by a modern award or an enterprise level agreement provisioning for annual leave loading should be paid this entitlement. Different modern awards can apply within the same organisation which means that employers need to be aware of the awards that apply to their employees.
Superannuation and Annual Leave Loading
Historically employers followed the ATO website and calculated their superannuation contributions for employees on the basis that annual leave loading was excluded from the definition of ordinary time earnings (OTE). In February 2019, the ATO revised their position clarifying that annual leave loading payments being treated as OTE are subject to superannuation guarantee contributions unless an employer can provide evidence to show that the entitlement to annual leave loading is referrable to an employee’s lost opportunity to work overtime and penalty rates.
Is Annual Leave Loading payable on termination?
As employees work, they accumulate leave balance. An employee who is terminated must be paid out for both their accrued annual leave and annual leave loading if he/she is eligible for both entitlements. This means that the amount payable for any untaken annual leave must include the 17.5% extra pay.
What do employers need to do?
We recommend the following action items for all employers that have employees covered by an award:
- check whether a modern award or enterprise bargaining agreement applies to your employees and if your employees are entitled to receive annual leave loading under the award/agreement
- Self-assess the superannuation treatment of annual leave loading payments going forward and ensure there is sufficient evidence in place to support this position.
- If your employees are entitled to annual leave loading, employers need to obtain written evidence demonstrating that the entitlement to annual leave leading is linked to an employee’s loss of opportunity to earn overtime and penalty rates. If the employer cannot obtain this evidence, the annual leave loading will form part of an employee’s ordinary time earnings, and superannuation contributions will have to made in respect of those amounts.
If you are an employer with concerns and would like further clarification on leave loading and super guarantee, please call Melanie or Renee for a chat.