A dispute over the annual loading paid to Victorian state school teachers has become one of the most closely watched super cases in the country. After losing in the Federal Court in July, the ATO has appealed, and it has put a range of its own decisions on hold while the Full Federal Court considers the case.

For employers, the question is simple but expensive: which payments attract the 12% super guarantee (SG)? With Payday Super now in force, the answer affects every pay run.

The payment at the centre of the dispute

The case is Department of Education v Commissioner of Taxation [2026] FCA 898, decided by Justice Button in July 2026.

It concerned a "salary loading allowance" paid each year by Victoria's Department of Education to government school teachers. The allowance is 17.5% of four weeks' normal salary, the same formula commonly used for annual leave loading.

According to PwC's summary of the judgment, the payment was known as a "recreation leave allowance" before 1 July 2008 and was excluded from salary. From that date it was paid on top of ordinary salary, based on whether a teacher was employed at a fixed date rather than on hours worked.

The ATO took the view that the allowance formed part of teachers' ordinary time Earnings (OTE), the base on which SG was calculated before Payday Super. It issued amended SG charge assessments covering the period from 1 April 2004 to 31 December 2022.

Why the Federal Court ruled against the ATO

Justice Button held that the salary loading allowance was not OTE, and set aside the amended assessments.

Law firm Clayton Utz reports that the Court treated the allowance as a separate entitlement paid on top of teachers' standard hours, not as payment for ordinary hours worked. The firm notes that the Court relied on the Full Federal Court's 2019 BlueScope Steel decision, which said OTE is tied to the objective rates for ordinary hours.

Importantly, the Court rejected what advisers have called the ATO's "binary" approach. Under that approach, a payment is treated as OTE unless it can be shown to relate only to hours outside ordinary hours, such as overtime.

The ATO's long-standing guidance has treated annual leave loading as OTE unless it is demonstrably linked to a lost opportunity to work overtime. That is why employers well beyond Victoria's schools are paying attention.

What the ATO has put on hold

The Commissioner has appealed to the Full Federal Court. As reported by Accountants Daily on 13 August 2026, the ATO issued an interim decision impact statement setting out how it will operate while the appeal runs.

The ATO will not finalise three types of decisions where they turn on the meaning of OTE:

  • requests for advice about whether particular amounts are OTE
  • compliance decisions, including issuing SG charge assessments or amended assessments
  • decisions on objections against those assessments

According to that report, the ATO said recovery of the Liability "will generally be deferred pending the outcome of the appeal". Recovery would only be pursued if the Commissioner is ultimately successful.

There is an exception. Where a decision must be made, for example because a time limit is expiring or an employer has served a notice requiring action, the ATO says it will decide in line with its existing interpretation of the law.

The ATO has also said it will not finalise its draft Law Companion Ruling LCR 2026/D1, Payday Super: qualifying earnings, until the appeal is concluded.

Why the case matters under Payday Super

Since 1 July 2026, SG has been calculated on "qualifying earnings" rather than OTE, and employers must make sure contributions reach funds within seven Business days of each payday.

Clayton Utz says the qualifying earnings base mirrors the way OTE worked. That means the outcome of the teachers' case is likely to shape whether leave loadings, some allowances and certain bonuses attract SG under the new system. Because a 17.5% leave loading is common in awards and enterprise agreements, the final outcome could reach well beyond the public sector.

The cost of getting it wrong has also risen. Under the new SG charge, late or missing contributions attract notional earnings and an administrative uplift of 60% of the shortfall and notional earnings, according to the ATO.

A worked example: what is at stake for one teacher

The following example is hypothetical and uses today's 12% SG rate for simplicity. SG rates were lower during most of the period covered by the assessments.

Suppose a teacher earns a salary of $100,000. Four weeks' normal salary is about $7,692 ($100,000 x 4 / 52). A 17.5% loading on that is about $1,346.

If that loading attracted SG at 12%, the extra contribution would be about $162 a year. For a single employee the amount is modest. Across a large workforce and a period of almost two decades, including charges, it could become substantial, which helps explain why both sides are fighting the case. The total amount at stake in the Victorian dispute has not been publicly reported.

What employers are being told, and what comes next

Advisers including PwC and Clayton Utz say employers should be cautious about changing their SG treatment while the appeal runs. A first-instance decision can be overturned, and the ATO's existing view still applies to decisions it is required to make.

Clayton Utz notes that whether the ruling helps a particular employer depends on how closely its payments resemble the Victorian allowance. Payment terms, industrial instruments and how an entitlement is triggered all matter.

Employees who believe their super has been underpaid can raise it with their employer or the ATO. The outcome for any individual will depend on their award or agreement and on the appeal.

Looking ahead, the key event is the Full Federal Court's decision. No hearing date has been confirmed in reports so far. Either side could then seek special leave to appeal to the High Court, which would extend the uncertainty.

Until then, OTE-related rulings, SG charge assessments and objections remain on hold, and qualifying earnings guidance is still in draft. Employers who pay loadings or allowances may want to document their current position and the reasons for it.

A registered tax agent or employment law adviser may help assess how the case applies to individual pay arrangements.