Private ruling: Annual leave loading and ordinary times earnings
Date of advice: 14 January 2021
Published: March 2021

Ruling: Q1: Is annual leave loading paid by the Company to Workers classified as Ordinary Time Earnings (OTE)? | A1: Yes, annual leave loading paid to Workers will be classified as OTE. | Q2: Is annual leave loading paid by the Company to Administrative Staff and Team Leaders classified as OTE? | A2: Yes, Annual leave loading paid to Administrative Staff and Team Leaders will be classified as OTE.

Relevant facts and circumstances: • You lodged a private ruling application requesting our advice as to whether annual leave loading paid to staff under the various awards are included or excluded in OTE. • You have advised that the employees are employed under various awards from the period of 2015 to now. • The awards contain relevant information concerning the ordinary hours of work, shift work, allowances and penalties, overtime and annual leave loading. • You have supplied copies of the awards. Detailed reasoning Subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 defines OTE as: (a) the total of: (i) earnings in respect of ordinary hours of work other than earnings consisting of a lump sum payment of any of the following kinds made to the employee on the termination of his or her employment: (A) a payment in lieu of unused sick leave; (B) an unused annual leave payment, or unused long service leave payment, within the meaning of the Income Tax Assessment Act 1997; and (ii) earnings consisting of over-award payments, shift-loading or commission; ... In broad terms (and subject to some exceptions), OTE of an employee means earnings in respect of ordinary hours of work. Payments for work performed outside the ordinary hours of work, such as overtime payments, are not OTE. The Commissioner's views on OTE generally, including an employee's ordinary hours of work are included in Superannuation Guarantee Ruling 2009/2 - Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2); specifically, at paragraph 25 which states: All amounts of earnings in respect of employment are in respect of the employee's ordinary hours of work unless they are remuneration for working overtime hours, or are otherwise referable only to overtime or to other hours that are not ordinary hours of work. There is no such thing as earnings that are merely in respect of employment generally and are not OTE because they are not in respect of any particular hours of work. On the topic of payments received while on leave, paragraphs 32 and 235 relevantly provide that payments on leave that are a continuation of ordinary pay are OTE: 32. Subject to the exclusions mentioned at paragraph 34 of this Ruling, salary or wages that an employee receives, at or below his or her normal rate of pay for ordinary hours of work, in respect of periods of paid leave is simply a continuation of his or her ordinary time pay. It is OTE. It does not matter whether the entitlement to take the paid leave accrued gradually over time, arose in a specified circumstance or following a specified event, or was simply granted to the employee in the exercise of the employer's discretion. In contrast, paragraphs 35 and 238 provide that 'leave loadings' may be outside OTE where they are demonstrably referrable to a notional loss of opportunity to work overtime or other similar non-ordinary hours remuneration: 35. The principle in paragraph 32 of this Ruling does not extend to extra payments by way of 'leave loadings', and like payments, that are demonstrably referable to a notional loss of opportunity to work overtime, or similar. 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'. These paragraphs collectively indicate a test for whether 'annual leave loading' payments are OTE is based on the reason for the entitlement - that is where a payment of annual leave loading is demonstrably referable to a notional loss of opportunity to work overtime, that amount of such a payment does not form part of OTE. If the notional loss of opportunity cannot be demonstrated though, the amount of the payment does form part of OTE. Historically, annual leave loading was paid to compensate workers for extra payments they would have received if they weren't on leave, in some cases this may have included overtime. However, an analysis of the historical industrial relation landscape reveals that in many cases annual leave loading was being paid for other reasons such as penalty rates, shift allowances and holiday bonuses. For example, in the Annual Leave Cases 1971 (1972) 144 CAR 528 it was held (at 532) that " It was pointed out that many, probably the majority, of employees during their working year received more than their ordinary award rate each week while they are at work. They are paid over awards, shift allowances, special penalties, overtime and other amounts which give them a regular income over the award minimum, though it may well be an income which varies from time to time, even from week to week." Similarly, in the General Ruling; Queensland Industrial Relations Commission (1973) AILR 694 it was held that "[A]wards and industrial agreements should in future provide that annual holiday pay should be calculated by adding:- (a) the appropriate award wage rate for ordinary hours worked; (b) any over-award payment payable as for ordinary hours of work; (c) shift work premiums including week-end penalty rates; (d) leading hands' (or similar) allowances (where applicable); and (e) any other payments which by the terms of the appropriate award or industrial agreement are payable for annual holiday purposes...in any case where the total payment so arrived at would not amount to the employee's ordinary wage rate for his ordinary hours of work...plus 17.5%, such employee should be paid in lieu thereof his ordinary wage rate...for the period of the annual holiday plus 17.5% thereof." Further, in Federated Liquor and Allied Industries Employees Union of Australia v Ansett Airlines of Australia & Ors (1975) 166 CAR 610 the Australian Conciliation and Arbitration Commission acknowledged that one of grounds of the union in securing an the annual leave loading entitlement in the Airport and Overseas Passenger Terminal Employees Award was that there was by that time an Australia wide standard for a 17.5 per cent loading (as opposed to compensating employees for any particular kind of remuneration) As historical evidence illustrates that annual leave loading may be paid to compensate payments other than overtime, or may be paid without compensating for any particular payments, an annual leave loading entitlement cannot be 'demonstrably referrable' to a lost opportunity for overtime without some positive linkage between the entitlement and overtime. In providing guidance as to what might constitute an annual leave loading payment being demonstrably referable to a notional loss of opportunity to work overtime, the Commissioner has published material on the ATO website under the heading Ordinary time earnings - annual leave loading . This guidance states that relying on historical opinions of the initial purpose of annual leave loading generally won't be enough to demonstrate that a specific annual leave loading entitlement relates to a lost opportunity to work overtime. Written evidence is required, such as specific wording in the Award or Agreement or in a policy document agreed to by all parties that states why annual leave loading is being paid. In this case, there is no documented evidence to establish that the annual leave loading is compensation for loss of opportunity to work overtime. Consistent with paragraph 25 of SGR 2009/2 the payment of annual leave loading is considered to be payment in respect of ordinary hours of work as it is not solely related to periods of overtime. The payment is considered OTE and should be included in the calculation of superannuation guarantee entitlements to all employees.



This advice applies for the following periods: 1 July 2019 to 30 June 2021