ATO Interpretative Decision

ATO ID 2007/73 (Withdrawn)

Superannuation

• This ATO ID is withdrawn as it is superseded by Superannuation Guarantee Ruling SGR 2009/2.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

How are the ordinary hours of work to be determined for the purposes of the definition of 'ordinary time earnings' in subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA), for an employee who is covered by an award but has also entered into an individual agreement with the employer that requires the employee to work hours in excess of the ordinary hours contained in the award?

Decision

The ordinary hours of work for the purposes of the definition of 'ordinary time earnings' in subsection 6(1) of the SGAA, for an employee who is covered by an award but has also entered into an individual agreement with the employer that requires the employee to work hours in excess of the ordinary hours contained in the award, are to be determined based on the hours of work in the agreement.

Facts

The employee is working for the employer under the relevant award (the award).

Under the award, employers are required to make contributions for their employees based on 'ordinary time earnings' as defined in subsection 6(1) of the SGAA.

The ordinary hours of work for employees covered by the award are an average of 38 hours per week.

The employer is making contributions for the employee based on the ordinary hours of work in the award.

Under the award, employees are to be paid overtime rates for all work done outside the ordinary hours of work specified in the award.

The employer has entered into an individual agreement (the agreement) with the employee under which the employee is required to work 60 hours a week.

The hourly rate applied under the agreement is inclusive of allowances for overtime and penalty rates.

The agreement has not been lodged with the Employment Advocate under subsection 347(1) of the Workplace Relations Act 1996.

Reasons for Decision

Section 16 of the SGAA states that the superannuation guarantee charge (SGC) imposed on an employer's superannuation guarantee shortfall for a quarter is payable by the employer. An employer can avoid a liability to the SGC by making superannuation contributions at a specified percentage (9%) of each of their eligible employee's 'notional earnings base' by the quarterly cut-off dates in the SGAA.

The concept of 'notional earnings base' is defined in the SGAA. In broad terms, it means the earnings of the employee by reference to which the requisite employer contribution is to be calculated. An employee's notional earnings base may be contained in an industrial award or agreement, a fund's trust deed, an agreement with an employer or a law of the Commonwealth, of a State or of a Territory. If none of these are applicable, then the default earnings base of 'ordinary time earnings' as defined in subsection 6(1) of the SGAA will apply.

In this case, the award requires all employers subject to the award to make contributions for their employees based on 'ordinary time earnings' as defined in subsection 6(1) of the SGAA, and as that phrase is interpreted by rulings of the Tax Office from time to time.

Under subsection 6(1) of the SGAA 'ordinary time earnings' in relation to an employee means earnings in respect of ordinary hours of work (other than certain lump sum payments made to the employee on termination of employment) and earnings consisting of over-award payments, shift-loading or commission.

In Australian Communication Exchange Ltd v. Deputy Federal Commissioner of Taxation [2003] HCA 55; (2003) 2003 ATC 4894; (2003) 53 ATR 834(ACE) the High Court considered it necessary to construe the relevant award in order to determine the superannuation entitlements of casual employees subject to the award. In ACE, the employer was required to make superannuation contributions for their eligible employees based on 'ordinary time earnings' as defined in the award.

However, ACE is distinguishable from this case on the basis that the High Court in ACE was not required to construe the definition of 'ordinary time earnings' in the SGAA; rather it was required to construe the definition of 'ordinary time earnings' in the relevant award. In this case, the employee's notional earnings base is determined by reference to the definition of 'ordinary time earnings' contained in the SGAA.

In Kezich v. Leighton Contractors Pty. Ltd. (1974) 131 CLR 362 (Kezich) the High Court construed the expression - 'the ordinary hours he would have worked' in legislation dealing with workers compensation in circumstances similar to those exhibited in this case. In Kezich, the relevant award fixed an employee's ordinary hours of work as 40 hours a week and provided for overtime rates for all work performed in excess of the ordinary hours of work prescribed in the award. The employee was required by the terms of his engagement to work 60 hours a week.

The High Court unanimously determined that the term 'ordinary hours' contained in the relevant Act was to be given its meaning by the Act and not the award. Therefore, the ordinary hours the employee would have worked were 60 hours as per the terms of his engagement.

Crucially, Gibbs J explained the meaning of the term 'ordinary hours of work' in the context of the relevant Act at 364-365:

The word "ordinary" means "regular, normal, customary, usual". A man's "ordinary hours" of work are the hours during which it is usual for him to work. There is nothing in the expression "ordinary hours" that connotes payment at a particular rate, and to understand the words as meaning "hours during work is done for which overtime is not paid" would be to place upon them a meaning which they simply do not bear. The expression "the ordinary hours he would have worked" in my opinion means the same as "the hours he would ordinarily have worked...[emphasis added]

The reasoning in Kezich was applied by the Federal Court in Quest Personnel Temping Pty Ltd v. Federal Commissioner of Taxation [2002] FCA 85; (2002) 2002 ATC 4116; (2002) 49 ATR 84(Quest). In Quest, the Court was required to determine, for the purposes of the definition of 'ordinary time earnings' in the SGAA, the ordinary hours of work of employees who regularly worked hours in excess of the minimum hours specified in their offers of employment. After citing some of the relevant passages from the judgments of Gibbs J and Mason J in Kezich, Gray J stated (at paragraph 27):

As is demonstrated by Kezich, there may be cases in which the working of hours beyond fixed standard hours becomes so regular, normal, customary or usual that the additional hours are to be regarded as ordinary hours for a particular employee. This may be so notwithstanding that the additional hours are remunerated at overtime rates or penalty rates.

Accordingly, it was held by the Federal Court that if the normal, regular, customary or usual hours of a particular employee were more than the minimum specified in that employee's offer of employment, then the actual hours worked were the 'ordinary hours of work' for the purposes of the definition of 'ordinary time earnings' in subsection 6(1) of the SGAA.

In this case, both the employer and the employee have agreed under the terms of the individual agreement that the employee's hours of work will be 60 hours a week. These are also the hours the employee has actually worked on a regular basis since entering into the agreement with the employer. As the employee has regularly worked additional hours over and above the ordinary hours prescribed in the award of 38 hours a week, and applying the principles established in Kezich and Quest, it therefore follows that the additional hours are to be regarded as ordinary hours for the employee. This will be the case, notwithstanding the fact that those additional hours attract overtime or penalty rates under the award.

The employee's ordinary hours of work for the purposes of the definition of 'ordinary time earnings' in subsection 6(1) of the SGAA will therefore be the hours actually worked as per the agreement, that is, 60 hours a week, not the ordinary hours of 38 hours per week prescribed in the award.

Year of income:  30 June 2006

Legislative References:
Superannuation Guarantee (Administration) Act 1992
   subsection 6(1)
   section 16

Case References:
Australian Communication Exchange Ltd v. Deputy Federal Commissioner of Taxation
   [2003] HCA 55
   (2003) 2003 ATC 4894
   (2003) 53 ATR 834

Keywords
Industrial awards & agreements
Superannuation guarantee charge

Business Line:  Superannuation Centre of Expertise

Date of publication:  20 April 2007

ISSN: 1445-2782