What you need to know
- On 10 July 2026, the Federal Court of Australia (Button J) delivered judgment in Department of Education v Commissioner of Taxation [2026] FCA 898. This decision has cast doubt on the ATO's long held views on ordinary time earnings (OTE).
- Since at least 2009, the ATO has interpreted OTE, and in particular "…earnings in respect of ordinary hours of work…", as generally meaning all of an employees' earnings other than overtime earnings (former SGR 2009/2 at [25] and LCR 2026/D1 at [32]).
- Contrary to the ATO's administrative position, the Court held that it is not necessary to establish that a payment is linked to additional hours of work or a loss of opportunity to earn overtime for it to fall outside of OTE. It is sufficient that the payment is not, on its proper characterisation, a payment "in respect of ordinary hours of work".
- Payments that may have previously been classified as OTE when applying the ATO's administrative position, may now be better classified as falling outside of OTE depending on the circumstances surrounding their entitlement.
- The Commissioner has lodged an appeal to the Full Federal Court and set out his views and administrative position in a Interim Decision Impact Statement (IDIS). Pending the outcome of the appeal process, LCR 2026/D1 continues to reflect the Commissioner's views on the interpretation of OTE.
What you need to do
- We recommend that employers proceed with caution and, where necessary, seek advice on specific circumstances relating to payments that are affected by this decision until the matter is settled by the Full Federal Court of Australia.
Facts
The Department of Education (of the State of Victoria) (Department) paid annual "salary loading allowances" (a payment akin to annual leave loading payments (ALL)) to teachers who had completed a year of paid service as at a specified date, with payments made on a pro-rata basis for part-time service. The salary loading allowance equalled 17.5% of four weeks normal salary (capped) and was forfeited on resignation before the eligibility date (subject to limited exceptions). The allowance was introduced in the mid-1970s to give teachers an equivalent loading to the "recreation leave loading" enjoyed by other Victorian public servants. The relevant industrial agreement specified ordinary hours of 76 hours per fortnight and did not provide for overtime payments (although time-in-lieu was provided).
Ultimately, the case concerned whether the salary loading allowance should have been included in teachers' notional earnings base (NEB) (for periods before 1 July 2008, by reference to the definition of “salary” in State legislation) and their OTE (for periods after 1 July 2008, by reference to section 6(1) of the Superannuation Guarantee (Administration) Act 1992 (Cth)).
Decision
The Court held that salary loading allowance did not form part of the teachers' OTE. Applying the leading Full Federal Court case on OTE, being BlueScope Steel (AIS) Pty Ltd v Australian Workers’ Union (2019) 270 FCR 359, her Honour held that the teachers’ salary is the payment they receive at ordinary rates for ordinary hours. The salary loading allowance is a payment made in addition to those salary payments and cannot be characterised as “earnings in respect of ordinary hours of work”.
The Court rejected the Commissioner's argument that the allowance may be characterised as “ordinary” merely because teachers did not work additional hours to earn it. Her Honour held at [66]:
Salary loading allowance will only be OTE if it is part of a teacher's "earnings in respect of ordinary hours of work". I do not consider that a payment, to which a teacher would be entitled if employed on a certain day of the year, but to which the teacher would not be entitled if he or she had resigned prior to that date, can be characterised as “earnings in respect of ordinary hours of work”. Rather, the salary loading allowance is a payment made in addition to the payments made to teachers by way of salary, in respect of their ordinary hours of work.
Her Honour also rejected the Department’s argument that the allowance was excluded from being OTE because it was linked to lost overtime, finding no such factual link was established. However, her Honour held that establishing such a link was not legally necessary for a payment to fall outside OTE. That is, at [69]:
…establishing that salary loading allowance is not part of OTE does not require the Department to establish that the payment is analogous to annual leave loading, or that its payment is connected to a loss of opportunities to earn overtime…There is simply no anchor in the statutory language, context or purpose for the proposition that unless the payment is analogous to annual leave loading, or can be shown to be linked to lost opportunities to earn overtime, it will be OTE. While the presence of such features may assist in the analysis, their absence is not determinative.
For completeness, in relation to salary loading allowance payments made before 1 July 2008, the Court held that the salary loading allowance did not form part of the teachers' NEB, finding it was a “recreation leave allowance” excluded from the definition of “salary” in the State Employees Retirement Benefits Act 1979 (Vic) and the State Superannuation Act 1988 (Vic), applying a substance-over-form approach.
Implications
In former SGR 2009/2 (eg paragraphs [27] and [174]) and LCR 2026/D1 (eg paragraphs [53] and [203]), the Commissioner asserted that all payments received by employees are OTE unless they relate solely to work performed outside ordinary hours, that is, they are overtime (and there is sufficient evidence proving as such). This judgment calls into question the validity of that administrative view, suggesting that it is insufficient to rationalise that a payment is OTE simply because it doesn't relate solely to overtime hours. The judgment suggests that the relevant inquiry is whether the payment is, on its proper characterisation within the relevant industrial instrument, a payment “in respect of ordinary hours of work”. This is a broader test for exclusion from OTE than the ATO currently applies.
Practically for employers, payments which are made “over and above” ordinary salary for ordinary hours, and which are contingent on factors other than the performance of work during those hours (such as employment status on a particular date, completion of a service period, or approval of an enterprise agreement), may now have a stronger basis for exclusion from OTE (and therefore from qualifying earnings from 1 July 2026). This may include annual leave loading payments, sign-on bonuses, retention payments, enterprise agreement approval bonuses, and similar lump-sum payments that are not referable to specific hours of work.
Outlook
The Commissioner has appealed the Federal Court's decision to the Full Federal Court of Australia and released the IDIS.
Pending the outcome of the appeal process, the Commissioner will not finalise LCR 2026/D1 or, where a decision turns on whether a particular amount is OTE, any of the following:
- 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; or
- objection decisions in relation to objects against SGC assessments or amended SGC assessments.
However, if a decision is required to be made, the Commissioner will make the decision consistent with existing ATO views of the law. In these circumstances, recovery of the associated liability will generally be deferred pending the outcome of the appeal and would only be pursued if the Commissioner is ultimately successful.
Until the appeals process is settled and any relevant ATO guidance is updated, employers should proceed with caution and take advice on their specific circumstances when making decisions in respect of whether to treat particular payments as OTE.
Authors: Sanjay Wavde, Partner; Bronwyn Kirkwood, Counsel; Craig Lewis, Lawyer and James Zhou, Lawyer.
