Cashing out annual leave: should employers pay the Super Guarantee?

Q&A

Cashing out annual leave: should employers pay the Super Guarantee?

Is cashed out annual leave considered ordinary time earnings for the purpose of calculating the Superannuation Guarantee employer contribution?

Is cashed out annual leave considered ordinary time earnings for the purpose of calculating the Superannuation Guarantee employer contribution?

This question was recently sent to our Ask an Expert service.
 
Q Due to a recent variation in modern awards – allowing cashing out of annual leave – we have been approached by several employees requesting such an arrangement.

While the company is happy to permit such requests, we are not sure whether the cashed out annual leave is considered ordinary time earnings for the purpose of calculating the Superannuation Guarantee employer contribution. We note the Superannuation Guarantee is not calculated on annual leave payable on termination of employment.

As cashed out annual leave is not taken as leave, does the legislation treat cashed out annual leave the same way as annual leave paid on termination?  Also, is there any anticipated change to the current levy of 9.5 per cent?
 
A Cashed out annual leave is considered part of an employee’s ordinary time earnings (OTE) for the purpose of calculating the 9.5 percent Superannuation Guarantee employer contribution under the relevant legislation.

The Australian Taxation Office issued a Ruling in 2009 which states that lump sum arrears payments of unused leave otherwise than on termination are OTE. Unused leave paid out on termination of employment however is not included in an employee’s OTE for Superannuation Guarantee purposes. 

Ordinary time earnings – what does it mean?

The Australian Taxation Office’s Ruling SGR 2009/2 provides the following table of payments:

Amounts INCLUDED are:
  • over award payments
  • shift loadings
  • commission payments
  • allowances or loadings related to an employee’s work, e.g. casual loading, site allowance, dirt allowance, freezer allowance, danger allowance, retention allowance, etc.
  • bonuses related to ordinary hours of work, e.g. performance bonus, bonus labelled as ‘ex-gratia’ but in respect of ordinary hours of work, Christmas bonus; piece rates;
  • paid leave and holiday pay
  • lump sum arrears payments of unused leave or salary and wages (other than on termination)
  • payments in lieu of notice
  • workers compensation (returned to work), and
  • directors’ fees.

Amounts EXCLUDED are:
  • overtime payments
  • lump sum payments on termination, e.g. payment in lieu of unused sick leave, annual leave or long service leave payments
  • on call or availability allowance (except doctors)
  • paid parental leave or other kinds of ancillary leave
  • leave loadings
  • ‘top up’ payments, e.g. jury service payments, defence reserve forces; private or domestic work under 30 hours per week
  • fringe benefits and other non-cash payments
  • some workers compensation payments (not working)
  • expense allowance payments and reimbursement of expenses incurred by an employee
  • redundancy payments, and
  • payments for unfair dismissal.

Ordinary hours of work

The SGR 2009/2 provides the following with respect to an employee’s ordinary hours and ordinary time earnings (OTE):
  • Overtime may constitute OTE if the earnings relate to an employee’s ordinary hours of work. An employee’s ‘ordinary hours of work’ are the hours specified as his/her ordinary hours of work under the relevant award or agreement, or under the combination of such documents, that governs the employee’s conditions of employment.
  • If an employee’s ordinary hours of work are not specified in a relevant award or agreement, then the employee’s ordinary hours of work are the ‘normal, regular, usual or customary hours’ worked by the employee, as determined in all the circumstances. This requires an employee-by-employee analysis.
  • Where it is not practicable to determine an employee’s regular, usual or customary hours of work, the employee’s ordinary hours of work will be the actual hours worked by the employee. This may increase the cost of superannuating employees who are not covered by an award or agreement detailing the employee’s ordinary hours of work.
  • A bonus is regarded as OTE in most cases. Only ‘a discrete and clear identifiable bonus payment that relates solely to work performed entirely outside ordinary hours will not constitute OTE’. Even ex gratia bonuses that are not expressly linked to performance, such as Christmas bonuses, are considered OTE.

More beneficial terms – awards/agreements

Where an award or agreement has superannuation entitlements more beneficial than those prescribed by the Superannuation Guarantee legislation, an employer must comply with the award or agreement.

Where an employee’s contract of employment with a definition of OTE under their individual contract of employment that provides a more beneficial outcome with respect to employer superannuation contributions will prevail over the SG Ruling.

Future changes to SG levy

At this stage, the Superannuation Guarantee rate will remain at 9.5 per cent for the 2017/2018 financial year. Based on revised laws, the Superannuation Guarantee rate will remain at 9.5 per cent for another five years, increasing to 10 per cent from 1 July 2021, and eventually increasing to 12 per cent from 1 July 2025.

The bottom line: Cashed out annual leave or long service leave is included in an employee’s ordinary time earnings for the purpose of calculating the Superannuation Guarantee’s 9.5 per cent employer contribution. An employer should also refer to the applicable modern award, enterprise agreement, or the terms of the employee’s contract of employment to check whether a more beneficial definition of OTE applies.

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