Advivo shares how to correctly process annual leave for compulsory superannuation purposes over the busy holiday period…

Over the Christmas and New Year period, many of our clients ask us for assistance about employee leave entitlements. To help you get by the busy holiday period, we have put together a list of everything you need to know about annual leave loading for compulsory superannuation purposes.

What is Annual Leave Loading?

Annual leave loading is an entitlement contained within most modern awards and covers employees in industries including finance, insurance, banking, administration, retail, hospitality, agricultural, horticultural, mining, manufacturing and building and construction.

On top of employees’ base pay rate, annual leave loading is an additional payment of 17.5% (generally) during periods of annual leave. This was initially incorporated into modern awards as compensation to employees who usually receive overtime and penalty rates during work periods for a shortfall in wages during annual leave.

Superannuation and Annual Leave Loading

The ATO has recently clarified its position that annual leave loading will be classified as ordinary time earnings (OTE) unless it is referrable to a lost opportunity to work overtime. This is consistent with the ATO’s public ruling SGR 2009/2.

Following this, there is a risk that employers may be liable to a superannuation guarantee charge, as well as nominal interest, administrative fees, and penalties, for potential underpaid superannuation contributions.

ATO’s Compliance Approach to Future Quarters

For annual leave loading to be excluded from calculations of OTE, employers must obtain written evidence that the entitlement is ‘demonstrably referrable’ to a lost opportunity to work overtime. This includes:

  • Wording in the relevant modern award or enterprise bargaining agreement clarifying the reason for the entitlement;
  • Other written evidence including a document 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.

What does this mean for Employers?

Employers must check whether a modern award or enterprise bargaining agreement applies to their employees and if their employees are entitled to receive annual leave loading under the industrial instrument. If your employees are, you need to obtain written evidence demonstrating that the entitlement to annual leave loading is linked to an employee’s loss of opportunity to work overtime and earn penalty rates. If you cannot obtain this evidence, the annual leave loading will form part of the employee’s OTE and the superannuation contributions will have to be made in respect to those amounts.

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