The employer never proved the lost overtime link the ruling demands. It won anyway.
Does your client pay super on annual leave loading?
The ATO position since 2009: leave loading is OTE, and super payable, unless “demonstrably referable” to a lost opportunity to work overtime (SGR 2009/2).
The Federal Court has held the Victorian teachers’ loading was not OTE. The employer never proved the lost overtime link. It won anyway. Department of Education v Commissioner of Taxation [2026] FCA 898.
What happened
First, the basics. Underpaid super attracts the superannuation guarantee charge, calculated on “total salary or wages” plus interest and a fee [6]. From 1 July 2008, contributions are measured against OTE: “earnings in respect of ordinary hours of work” (s 6(1) SGA Act). Before then, against a “notional earnings base” set by two Victorian Acts whose “salary” definition excluded any “recreation leave allowance” [10].
Victorian teachers get an annual “salary loading allowance” of 17.5% of four weeks’ salary, paid only if employed on the eligibility date [17-19]. Resign the day before and, death and retirement aside, it vanishes.
Why the loading escaped
Button J traced the allowance to 1975: it gave teachers the recreation leave loading other public servants enjoyed [38]. Teachers never take their 20 days of leave on identified days; leave is acquitted in school holidays, so payment turns on an employment date, not on leave taken [57]. In substance it remained a recreation leave allowance, excluded from “salary”, and so outside the notional earnings base before 2008 [58-59].
From 2008, the Commissioner argued the allowance was “ordinary”: teachers did nothing extra to earn it [64]. Button J disagreed [65]. Applying BlueScope, the only question is whether the allowance is “earnings in respect of ordinary hours of work” [63]. It is not. A teacher who resigns before the eligibility date loses it entirely; the allowance is paid on top of the salary for ordinary hours [66].
The sentence to remember: there is “simply no anchor in the statutory language” for the idea that a payment must be analogous to leave loading, or linked to lost overtime, before it escapes OTE [69].
The practical takeaway
First, the ATO’s lost overtime formula looks exposed. The link failed on the evidence here, yet the loading escaped [41, 60]. The payment’s character decides, not its history.
Second, conditionality matters. A payment contingent on being employed at a date is hard to characterise as earnings for ordinary hours [66]. Expect argument over other conditional lump sums.
Third, exposure runs long. Eighteen employee queries became 75 quarters of assessments back to April 2004, with ramifications for many thousands of teachers [3-4]. Even a State department carried the onus, and met it [59, 74].
It is a first instance decision. Watch for an appeal.
General information only. This note was accurate when written. The law may have changed since and the note is not updated. It is not legal or tax advice, does not take account of your circumstances and must not be relied upon as a substitute for advice on your own matter. If the issue is live for you or your client, email arda@nortonquaytaxlaw.com.au for advice on the current position.