Businesses are being warned they could be on the hook for back payments after the tax office started reviewing how superannuation applies to leave loading.
While tax agents have historically maintained superannuation has not applied to leave loading because it’s not considered ordinary time earnings (OTE), a change in interpretation of the law by the ATO has thrown that up into the air.
Leave loading is an extra payment some workers get on top of annual leave, first introduced to smooth out income for workers who are paid overtime while they are on holiday.
However, those employers paying leave loading on top of normal earnings, not necessarily to compensate for a loss of overtime, are now potentially on the hook for extra super payments.
The change has been undertaken to clarify the implementation of superannuation guarantee charge legislation, which is a fee an employer faces when they fail to pay super correctly.
Businesses who underpay super are on the hook for back payments, additional interest fees on those amounts and a $20 per employee per quarter administration fee.
Paul Rafton, BDO’s national leader for superannuation, tells SmartCompany the application of super to leave loading has traditionally been a “grey area” but has been cleared up by the ATO.
“It’s important to look at your last five years and understand what your potential risk is,” Rafton says.
“It’s not a matter of if the ATO catches you, it’s a matter of when.”
As an example, Rafton said a business which doesn’t pay overtime but does pay leave loading would previously not have had to pay super on that loading.
But under the new interpretation that loading is classified as ordinary time earnings because no overtime is being paid, and thus super is payable.
Leave loading is typically 17.5% on top of the annual leave rate, but this varies and depends on employment agreements and modern awards.
Rafton says businesses who pay leave loading could be exposed and there’s no limit in how far the ATO can go back to apply the rules.
“It’s a latent risk that’s always there,” he says.
Businesses who “do the right thing” still at risk of penalties
Accountant Lisa Greig of Perigee Advisers says superannuation and leave loading is a “very technical” aspect of taxation law.
“It would be unfortunate for businesses trying to do the right thing, and who think they are doing the right thing, to get pinned with penalties,” she tells SmartCompany.
“It’s bizarre because leave loading has always been designed to compensate for additional penalties people have.
“[The ATO] is trying to clean everything up.”
Healthy Business Finance’s Stacey Price says business owners doing their own books are likely to get this “completely wrong”.
“Accounting software will need to be set up correctly to ensure super calculates where it needs to and also so that it doesn’t calculate when it doesn’t need to,” Price tells SmartCompany.
“Assuming the software will just magically work it out is not the best option.”
Greig says the intention behind leave loading is important and businesses at risk should take steps to clarify why they are applying leave loading with the ATO.
“Intention is so important in tax … what’s the intention of what that leave loading represents?”