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Recently, the Australian Taxation Office released a “guide” relating to ordinary time earnings and the payment of superannuation on annual leave loading. The ATO has taken the view that unless annual leave loading is referrable to a lost opportunity to work overtime, it should be considered ordinary time earnings and therefore, superannuation will be payable on that loading. The ATO refers to the fact that most Modern Awards do not specifically state the reason why the annual leave loading entitlement is provided.

Once again, the ATO has ridden roughshod over industrial relations law and legal history. Annual leave loading has been around at least since the 1960s and has been common across Australia since the 1970s. Annual leave loading entitlements were originally intended to ensure that employees were not financially disadvantaged during a period of annual leave. That is, they were intended to compensate employees for their inability to obtain overtime, penalties, and allowances that contribute to their usual weekly pay.

However once again, Australian businesses have to navigate through a convergence of conflicting federal government agency views and determinations. While the ATO appear to be ignoring legal history they recognise “the evidentiary difficulties in identifying the purpose for annual leave loading entitlements”. It states that the scrutinising of compliance on this issue will not occur where an employer holds a reasonable position that the annual leave loading was for a notional loss of opportunity to work overtime and or that there is no overtime (less than five years old) that suggests the entitlement was for something other than overtime.

Businesses that pay employees an “all-up” rate of pay that incorporates annual leave loading (and other allowances and loadings) will likely be making superannuation contributions on that “all-up” rate already, unless otherwise identified. As a result, such businesses will likely not experience any change.


Given the history of the issues, generally, most businesses with Award-covered employees most likely already hold the “reasonable position” that annual leave loading is and was paid to employees for the “lost opportunity to work overtime”. That being said, we recommend some further entrenchment of this long-held view within your business. This may be undertaken in the following ways:

  1. The interleaving of relevant statements to such an effect into an annual leave loading policy within the business; and or
  2. A revision to future contracts of employment, particularly for those employees who may be Award-covered, that states the purpose of the payment of annual leave loading.

Help For Subscribers

To assist our subscribers with this issue, we have updated our Annual Leave Policy template and interleaved a statement within our Award-Covered Employee contract generator (the contract wizard) to ensure your business can evidence its compliance.

To access these resources: Login to Better HR

For businesses with pre-existing Award-Covered Employee contracts of employment, we recommend you implement and or update existing annual leave policies and alter the employment contracts going forward.

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