ATO to appeal Federal Court decision involving salary loading allowance

The allowance was paid annually to teachers on a specific date when they had completed a year of service doing their ordinary hours of work. The allowance was calculated as 17.5 per cent of the total of four weeks' normal salary.

The relevant notional earnings base in this case was provided for under the State Employees Retirement Benefits Act 1979 (Vic) and the State Superannuation Act 1988 (Vic). These acts required superannuation to be paid on 'salary' as defined in the acts. Relevantly, the definition of 'salary' excluded 'recreation leave allowance' and 'payments of a temporary character'.

In the commissioner's view, the salary loading allowance fell within the relevant notional earnings base and was OTE, respectively. However, the Federal Court ruled against this view.

The court held that the salary loading allowance did not form part of the relevant notional earnings base for the periods prior to 1 July 2008.

The Federal Court considered evidence regarding the purpose of the allowance when it was first introduced in the 1970s, and accepted that the salary loading allowance was introduced to give teachers an equivalent loading to the recreation leave loading enjoyed by their public service counterparts. It further accepted that the salary loading allowance was named as it was and structured as it was due to the particular arrangements for teachers, which resulted in the formal entitlement to four weeks' annual leave not being taken over an identified period within the school holidays.

The court held that the expression 'recreation leave allowance' in the relevant legislation is properly to be construed as capturing allowances that were, in substance, recreation leave allowances even if they were not paid when an employee literally took annual (recreation) leave.

"The Court found that the salary loading allowance was therefore a recreation leave allowance, albeit one paid in a bespoke manner due to the peculiarities of the teaching profession, and that it had not lost that character since it was first introduced in the 1970s," the ATO said.

"Accordingly, the salary loading allowance was not 'salary' as defined under the relevant Acts and therefore did not form part of the notional earnings base."

For the periods after 1 July 2008, the Court also held that the salary loading allowance was not OTE for periods from 1 July 2008.

"The Court held that, where an industrial award or agreement nominates a salary for an employee's ordinary hours, that is the payment they receive at ordinary rates of pay for their ordinary hours. Amounts that are paid in addition to these amounts will not be OTE," the Tax Office said.

"The Court found that the salary loading allowance was an amount additional to the base salary in the relevant industrial agreements and therefore was not OTE, even though teachers did not need to perform any work beyond their ordinary hours to receive the payment and it was not compensation for a lost opportunity to work overtime."

In its interim decision impact statement, the ATO said that the commissioner has appealed the Federal Court's decision for both the allowance payments made before and after 1 July 2008.

"Draft Law Companion Ruling LCR 2026/D1 Payday Super: qualifying earnings continues to reflect the Commissioner's views on the interpretation of OTE, which is included within the term 'qualifying earnings' in section 10A of the SGAA from 1 July 2026. However, the Commissioner will not seek to finalise that Ruling until the appeal process has concluded," the ATO said.

Pending the outcome of the appeal process, the ATO said that where a decision turns on whether a particular amount is OTE, it does not propose to finalise:

• Requests for advice concerning whether particular amounts fall within the meaning of OTE.
• Decisions in compliance activity, including issuing SGC assessments or amended SGC assessments.
• Objection decisions in relation to objections against SGC assessments or amended SGC assessments.

"However, if a decision is required to be made, for example, because the employer's period of review will elapse or the employer gives notice requiring the Commissioner to make an objection decision, our decisions will be consistent with the existing ATO view of the law," the Tax Office said.

"In these circumstances, recovery of the liability will generally be deferred pending the outcome of the appeal and would only be pursued if the Commissioner is ultimately successful."