Federal Court finds salary loading is not ordinary time earnings: What employers need to know

The Federal Court has delivered a decision concerning a "salary loading allowance" that challenges the Australian Taxation Office's (ATO) long-standing position on annual leave loading and superannuation guarantee (SG). The ruling comes at a critical time, with Payday Super now in effect as of 1 July 2026 and many employers continuing SG compliance reviews.

The challenged superannuation guarantee charge: the status of salary loading allowances

In Department of Education v Commissioner of Taxation [2026] FCA 898, the Victorian Department of Education challenged amended SG charge (SGC) assessments issued by the Commissioner for the period 1 April 2004 to 31 December 2022. The Commissioner had determined that a "salary loading allowance" paid to teachers (calculated as 17.5% of four weeks' normal salary and equivalent in substance to annual leave loading) formed part of the teachers' ordinary time earnings (OTE) for SG purposes which resulted in the higher amount of SGC being assessed. For the pre-1 July 2008 period, the question was whether the allowance formed part of the "notional earnings base" under the earlier SG charge scheme, which relied on State-level superannuation legislation.

Justice Button found that the allowance was not a part of "salary" under applicable Victorian superannuation legislation (pre-1 July 2008) and neither did it form OTE, and that the amended assessments were excessive.

Salary loading allowances and ordinary time earnings under the superannuation guarantee

Relying on the Full Federal Court's analysis in BlueScope Steel (AIS) Pty Ltd v Australian Workers Union [2019] FCAFC 84 (BlueScope), Justice Button held that OTE refers to what an employee earns for working their ordinary hours at ordinary rates. The Court therefore affirmed the findings in BlueScope that the earnings are identified by reference to an objective standard, and that there is no factual inquiry into the hours ordinarily or usually worked by an individual employee. Accordingly, payments made in addition to salary for ordinary hours, and which an employee would not receive if they resigned before the relevant eligibility date, cannot be considered "earnings in respect of ordinary hours of work". The salary loading allowance was deemed a separate entitlement, paid over and above what teachers received for their 76-hour fortnight.

The Court also considered and relied on the historical origins of the salary loading allowance, noting that it was introduced in the mid-1970s to provide teachers an equivalent entitlement to the recreation leave loading received by other public servants, rather than as compensation for lost overtime opportunities. This supported the conclusion that the allowance was a distinct entitlement paid in addition to ordinary salary, rather than earnings for ordinary hours of work.

Importantly, the Court rejected the notion that a payment must either relate to overtime or be classified as OTE. At [69], Justice Button stated there is "simply no anchor in the statutory language, context or purpose" for this binary approach, directly challenging the reasoning behind the ATO's published guidance.

Superannuation guarantee treatment of annual leave loading: a complicated history

The SG treatment of annual leave loading has been contentious since the introduction of the SG system in 1992. Section 6(1) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA) defines OTE as "earnings in respect of ordinary hours of work" and "earnings consisting of over-award payments, shift-loading or commission". Annual leave loading is not explicitly mentioned in either limb.

The ATO's position on this issue has shifted over time without changes to the underlying law. Initially, the ATO's guidance in SGR 94/4 categorised annual leave loading as not OTE, as it was paid "in respect of employment, not ordinary hours of work". However, in SGR 2009/2 (withdrawn from 1 July 2026), the ATO reversed this default position, asserting that leave loading is OTE unless it is "demonstrably referable to a notional loss of opportunity to work overtime".

This lack of clarity led to differing employer practices. Under SGR 2009/2, the ATO accepted that leave loading was not OTE if employers could provide clear written evidence (eg., an award, enterprise agreement or documented policy) linking the loading to a loss of overtime opportunities. However, many employers lacked such evidence, as most industrial instruments do not expressly state the purpose of leave loading. Some employers continued to exclude leave loading from SG calculations, relying on the original ATO position in SGR 94/4, and the broader principle established in BlueScope that OTE is limited to earnings for ordinary hours at ordinary rates.

The resulting uncertainty was significant enough to be repeatedly raised by the advisers and possibly contributed to the federal government's introduction of the SG amnesty (24 May 2018 to 7 September 2020), which allowed employers to correct historical SG shortfalls with partial remission of penalties.

It remains to be seen whether the Commissioner will appeal the decision.