Federal Court rules salary loading allowance not OTE for SG purposes

On 10 July 2026, the Federal Court handed down its decision in Department of Education v Commissioner of Taxation [2026] FCA 898. The case concerned whether annual “salary loading allowance” payments to Victorian Government school teachers formed part of the relevant superannuation earnings base.

Although the case also addressed the pre-1 July 2008 “notional earnings base”, given its ongoing relevance (including with respect to the concept of “qualifying earnings” under Payday Super), the key consideration is the Court’s conclusion that, from 1 July 2008, the allowance was not ordinary time earnings (OTE).

Most notably, the Court rejected the proposition that a payment is necessarily OTE unless it can be concluded as being in respect of additional (non-ordinary) hours, or analogous to some leave loading payments which are linked to lost overtime opportunities. That reasoning leaves important questions about the breadth of the Commissioner’s draft guidance in Law Companion Ruling LCR 2026/D1 addressing the “qualifying earnings” concept under Payday Super, noting that “qualifying earnings” includes payments that are OTE (and largely aligns to the now withdrawn Superannuation Guarantee Ruling SGR 2009/2, which applied prior to 1 July 2026). 

In this case, the Department employed teachers in Victorian Government schools and paid them an annual salary loading allowance calculated as 17.5% of four weeks of normal salary, subject to applicable caps or maximum amounts. The Commissioner of Taxation issued amended assessments for superannuation guarantee (SG) charges for quarters between 1 April 2004 and 31 December 2022, which the Department challenged in the Federal Court. For the post-1 July 2008 period, the central question was whether the allowance was OTE.

Section 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA) defines OTE by reference to “earnings in respect of ordinary hours of work” and otherwise, “earnings consisting of over-award payments, shift-loading or commission”. It was common ground that the salary loading allowance was not an amount consisting of over-award payments, shift-loading or commission.

Button J accepted that, historically, the allowance was introduced to give teachers an equivalent to annual leave loading, with its particular structure reflecting the way teachers’ annual leave was treated as acquitted during school holiday periods. That historical context was sufficient for Button J to conclude that, before 1 July 2008, the allowance was excluded from the teachers’ “notional earnings base” as a “recreation leave allowance”. However, for OTE purposes, Her Honour’s reasoning did not depend on proving that the payment was for additional (non-ordinary) hours, or akin to annual leave loading or compensation for lost overtime. 

Ordinary hours, ordinary rates and BlueScope

Button J’s OTE analysis was grounded in BlueScope Steel (AIS) Pty Ltd v Australian Workers Union [2019] FCAFC 84 (BlueScope), where Allsop CJ focused on earnings in respect of ordinary or standard hours at ordinary rates of pay under the relevant industrial instrument or contract.

Under the applicable industrial instrument, full-time teachers’ ordinary hours were 76 hours per fortnight, and their salary under Schedule 1 was treated as the payment at ordinary rates for those ordinary hours. The salary loading allowance was paid over and above that salary.

Button J accepted that teachers did not need to work additional hours to receive the allowance but held that this did not automatically make the allowance part of OTE – “… contrary to the Commissioner’s submissions … the fact that teachers do not have to work any additional hours to be entitled to salary loading allowance (does not) render salary loading allowance necessarily part of OTE.”

Her Honour reasoned that the allowance would only be OTE if it was “earnings in respect of ordinary hours of work” - and concluded that an annual payment (contingent on being employed on a particular date) was better characterised as “a payment made in addition to the payments made to teachers by way of salary, in respect of their ordinary hours of work.”

That is, the payment is in respect of ordinary hours of work, however, is not considered “earnings in respect of ordinary hours of work” for OTE purposes, on the basis that it is an additional payment on top of salary, where salary represents the ordinary rate for ordinary hours of work. 

Overtime compensation and lump sum payments

Another interesting aspect of the decision is Button J’s rejection of the proposition that a payment will be OTE unless, analogous to some annual leave loading payments, it is linked to lost overtime opportunities – stating that there is simply “no anchor in the statutory language, context or purpose” for this approach. Her Honour accepted that those features may assist the analysis but held that their absence is not determinative.

Button J also rejected the submission that, because the definition of OTE expressly excludes certain lump sum termination payments, any other lump sum payment not referable to excess hours must fall within OTE – “I do not accept that … any lump sum payment which is not referable to excess hours being worked (viz, salary loading allowance) likewise must fall within the statutory definition of OTE as “earnings in respect of ordinary hours of work””. 

Contrast with the Commissioner’s draft guidance

The decision has potential significance for the views in LCR 2026/D1, which states that the concept of OTE remains unchanged post Payday Super. The draft LCR provides its conceptualisation that earnings in respect of ordinary hours of work “are all earnings other than earnings that are solely in respect of non-ordinary hours of work”. This conceptualisation is consistent with SGR 2009/2, which applied prior to 1 July 2026.   

That formulation is somewhat challenging to reconcile with Button J’s conclusion that the salary loading allowance was not OTE even though it was not remuneration for overtime or additional hours. However, the decision should not be treated as a wholesale rejection of the Commissioner’s guidance, noting that Button J’s analysis concerned a particular annual lump sum allowance with a specific historical and industrial context.  

Notwithstanding, the decision raises questions about the breadth of the Commissioner’s default inclusion approach, with Button J’s reasoning suggestive that the analysis requires a substantive characterisation of the payment, rather than only asking whether the payment is solely referable to non-ordinary hours. 

This possible tension also impacts the guidance for payments such as annual leave loading and bonuses. The draft LCR states that annual leave loading is not OTE only if it “is compensation for a foregone opportunity to work overtime” (SGR 2009/2 used similar terminology - “demonstrably referable to a notional loss of opportunity to work overtime”), and that bonuses are generally OTE unless “related solely to work performed entirely outside ordinary hours” (consistent phrasing to SGR 2009/2).

Button J’s reasons may support a more nuanced analysis, but they do not remove the need to consider the Commissioner’s published view and the particular facts of the payment in question. Equally though, this decision, together with the decision in BlueScope, should provide sufficient justification for the Commissioner to reflect on whether his ‘OTE default position’ remains appropriate and accurate (i.e. OTE, unless solely in respect of non-ordinary hours). Unwinding this, though, would have significant implications for employers and employees alike, just as the shift from SGR 94/5 to SGR 2009/2 had some 17 years ago (when the default position was effectively introduced). There is an administrative convenience that comes with the default position and limiting the need to interrogate every payment, but at what financial cost?

Subject to any appeal, the decision is an important development in the interpretation of OTE for SG purposes. It confirms that the OTE inquiry is not necessarily answered by asking only whether a payment is for overtime or additional hours; the payment must still be characterised against the statutory phrase “earnings in respect of ordinary hours of work”.  

However, the decision should be applied cautiously. Button J’s reasoning was closely tied to the particular character, history and industrial context of the salary loading allowance paid to Victorian school teachers.  

The contrast with the Commissioner’s draft LCR (and historically, SGR 2009/2) is likely to be of particular interest, especially for payments above base-rates, such as annual leave loading and bonuses. Given the contrast to the approach by Button J, and the possibility that the Commissioner may appeal, employers should be careful before changing their superannuation treatment of allowances, loadings or bonuses solely on the basis of this decision. As such, it would be prudent to wait and see how the Commissioner responds, either in the form of a Decision Impact Statement, or an appeal.

If you have any questions regarding the Federal Court’s decision, the SG treatment of allowances, loadings or bonuses, or the broader implications of Payday Super and “qualifying earnings”, please reach out to your usual PwC employment taxes specialist for assistance.