What’s emerging? Recent decision raises questions over the application of superannuation to annual leave loading
11 August 2022
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On 27 July 2022, Justice Driver of the Federal Circuit and Family Court of Australia released his decision in the matter of Finance Sector Union of Australia v Commonwealth Bank of Australia [2022] FedCFamC2G 409. That case dealt with whether annual leave loading forms part of ordinary time earnings (OTE) and therefore, requires superannuation contributions under the superannuation guarantee (SG) regime.
In this case, the employer had not made superannuation contributions in respect of the annual leave loading paid to the employee. Under the employer's applicable enterprise agreements, annual leave loading was calculated at a 17.5% rate on the “employee’s Base Rate of Pay for the period of annual leave”. The “Base Rate” was, in turn, defined to be the ordinary rate of pay, excluding additional payments such as bonuses, loadings, allowances, etc.
In concluding that the relevant annual leave loading did not form part of OTE, His Honour noted that the loading was not paid at the ordinary rate of pay (i.e. it was an additional loading on top thereof) and also, was not paid by reference to ordinary hours worked (rather, it was paid on annual leave).
Of significant note, Justice Driver’s reasoning did not make reference to the well-known requirement that, in order for leave loading to be excluded from the OTE base, it must be “demonstrably referable to a notional loss of opportunity to work overtime”, as provided by the Commissioner of Taxation (the Commissioner) in his public ruling, Superannuation Guarantee Ruling - SGR 2009/2 - Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2).
The Court’s approach contrasted with the Commissioner’s approach?
His Honour's approach and, in particular, the absence of specific analysis as to whether the payment is or is not demonstrably referable to notional overtime, potentially sits in contrast to the Commissioner’s approach requiring a more positive nexus to be drawn to an overtime compensatory purpose. Rather, the Court’s approach focused on the fact that the payment was not made in relation to ordinary hours worked, nor paid at the ordinary rate.
In referencing the Full Federal Court’s decision in Bluescope Steel (AIS) Pty Ltd v Australian Workers' Union [2019] FCAFC 84, Justice Driver concluded that “the concept of OTE under (SG legislation) operates by reference to both ordinary hours of work and ordinary rates of pay”. Put another way, where a payment is not paid at an ordinary rate (for example, a loading on top of the ordinary rate) and not paid by reference to ordinary hours worked, then it is not likely to form part of OTE. In this regard, His Honour noted that leave loading is not an “ordinary” payment and is “calculated by reference to the period of annual leave rather than the ordinary hours worked”.
Justice Driver also reasoned that the history of annual leave loading suggests that it was introduced to compensate for payments that are not “ordinary”, which cannot be earned when on leave, and further, the employer’s specific history suggested that the payment may be “for additional work beyond an employee’s ordinary hours and at higher rates”. Finally, he notes a “practical attraction” to excluding annual leave loading from OTE to ensure “parity and a standardised approach”. That is, to ensure employees not going on leave who are paid at an ordinary pay rate for ordinary hours do not receive less superannuation than a counterpart on leave, who would otherwise receive superannuation on annual leave loading.
A key question arising from this decision is the continued efficacy of the “demonstrably referable to a notional loss of opportunity to work overtime” analysis. It is clear from the ATO’s relevant website guidance that the Commissioner’s expectations for annual leave loading to not be subject to superannuation is for an employer to demonstrate evidence of a nexus to lost overtime. That website guidance was first released in mid-2019 and, for future quarters, it provides that this evidence needs to be written. For previous quarters, it was provided that this purpose could be self-assessed, however the ATO’s expectation was that there must be no evidence that the payment was for something other than overtime.
By contrast, His Honour’s approach did not seek to establish an overtime connection or specific evidence in this regard; rather the focus remained on the fact that this was an additional payment (i.e. not at ordinary rates) and paid on annual leave, rather than ordinary hours worked.
Interestingly, and as noted in the decision, the employer had also sought private administratively binding advice from the Commissioner, where it was concluded that the annual leave loadings would not form part of OTE. In this regard, the employer had applied the ATO’s website guidance and updated its Group Leave and Attendance Policy in 2019 outlining an overtime compensatory purpose for the loading and, further, this was also subsequently documented in the 2020 Enterprise Agreement.
The Commissioner concluded that, in light of the documented purpose from 2019 onwards, it was accepted that annual leave loading was referable to a lost opportunity to work overtime for the preceding period. His Honour opined that the Commissioner’s advice, whilst arriving at the same overall conclusion, reflected a narrowed basis of reasoning than the much broader test determined by the Court.
What does this decision mean for employers?
This case may raise questions for the many employers which have analysed, or are analysing, their own annual leave loadings by reference to the Commissioner’s approach.
Following this decision, it could be argued that annual leave loading should not, generally speaking, form part of OTE on the basis that it is paid on top of the ordinary rate and paid on an annual leave period. However, it is conceivable that circumstances may exist where this position would not be so clear - for example, this case dealt with a fixed loading rate of 17.5%, but did not contemplate those instances where annual leave loading is calculated at the rate of the employee’s missed/lost shift-loadings, had the person not been on leave.
At the time of writing this article, the Commissioner has yet to issue a Decision Impact Statement on the case, and has not yet flagged any updates to SGR 2009/2. Employers should note accordingly that the Commissioner’s public view remains that annual leave loading is subject to superannuation unless demonstrably referable to notional overtime. In contrast, the Court’s approach potentially results in no superannuation obligation applying to annual leave loadings.
Justice Driver’s judgment leads to a question as to whether loadings and other payments which are not paid at an ordinary rate should not form part of OTE. While an exception may apply if the payments are “earnings consisting of over-award payments, shift-loading or commission”, His Honour concludes in his judgment that a payment for shift loading would not otherwise form part of OTE, but for the definition expressly including such payments.
Relevantly, this represents a second instance in recent times where a Court has arguably adopted a different approach to the long-held interpretation of the Commissioner in regard to SG. Specifically, the Full Federal Court’s decision in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118, regarding whether a dentist worked “under a contract that (was) wholly or principally for the labour of the person”, did not seek to apply the Commissioner’s three-pronged test in Superannuation Guarantee Ruling - SGR 2005/1 - Superannuation guarantee: who is an employee? (note, SGR 2005/1 is under review following recent Court decisions - read more at PwC Article - What’s emerging? Contractor or Employee: High Court decisions mark directional shift in analysis).
Given the potential for different conclusion with respect to superannuation on annual leave loadings where an employer seeks to apply the Commissioner’s public ruling, for employers seeking to rely on this decision to argue the absence of SG obligations for annual leave loading and/or other types of payments, it may be appropriate to engage with the Australian Taxation Office - for example, through the obtaining of a private administratively binding advice - to ensure that the regulator’s views aligns to the conclusions reached. In particular, with Single Touch Payroll phase 2 reporting, there is likely to be more regulator oversight and scrutiny on employers’ SG compliance (see PwC Article: What’s emerging? Auditor-General report on SG administration - ATO response and what employers should expect).
Further, employers should also be aware that the decision could be appealed to the Full Federal Court, meaning that the law on this issue may not yet be settled. Clearly, a considered response to this case will be important.
We await commentary from the Commissioner in relation to the impact of this decision on his public guidance as, undoubtedly, organisations will benefit from any guidance on offer which sheds light on how this decision plays out in practice. Watch this space!
