Edited version of administratively binding advice

Authorisation Number: 1011333659134

This edited version of your advice will be published in the public Register of private binding rulings after 28 days from the issue date of the advice. The attached Tax Office advice fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Advice

Subject: Ordinary Time Earnings

Question 1

Do performing artists' earnings from 'options' included in the Special Conditions (Clause 1, Part 1) and 'rollovers', as described in Clause C.1.(c) of Part 2 of the Standard Contract for Advertising Performances in Visual (on camera) Commercials fall within the definition of 'ordinary time earnings' (OTE) provided in subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

No. Performing artists' earnings from 'options' included in the Special Conditions (Clause 1, Part 1) and 'rollovers', as described in Clause C.1.(c) of Part 2 of the Standard Contract for Advertising Performances in Visual (on camera) Commercials do not fall within the definition of OTE in subsection 6(1) of the SGAA.

Question 2

Can the 'negotiated performance fee' paid to the performing artists' in accordance with subclauses 9.5.2(A) and 9.5.2(B) of the Actors Etc. (Television) Award 1998 (the Award) form the basis for calculating the applicable OTE?

Advice

Yes. The 'negotiated performance fee' paid to the performing artists' in accordance with subclauses 9.5.2(A) and 9.5.2(B) of the Award can form the basis for calculating the applicable OTE; provided that any payments for retakes, wardrobe calls and post-synchronization work which are excluded from the negotiated performance fee under 9.5.2(B) of the Award are included in the calculation of OTE.

This advice applies for the following period/s:

Year ended 30 June 2010

The arrangement commences on:

1 July 2009

Relevant facts and circumstances

Your advice is based on the following facts.

· The company employs staff under the Award.

· In December 2009, the Australian Taxation Office (ATO) received an application for advice as to whether earnings from options included in Special Conditions of the Standard Contract for Advertising Performances in Visual (On Camera) Commercials (the contract) formed part of OTE for the purposes of the SGAA.

· Attached to the application was a copy of the contract, which included a rollover clause but did not include any options clause under Special Conditions.

· The performing artists' hours of work are specified in clauses 12 and 13 of the Award

· The performing artists are paid a negotiated performance fee determined in accordance with subclauses 9.5.2(A) and 9.5.2(B) of the Award.

· Performing artists may also receive other payments relating to the additional usage of the finished product. These payments are referred to as 'options' and 'rollovers'.

· Option and rollover payments may be negotiated at the same time as the negotiated performance fee or negotiated independently at a later date.

· Option and rollover payments will only be made if the extended use goes to market.

· Option payments may be made to an artist where the principal has negotiated additional usage of an advertisement in other mediums (e.g. a commercial produced for television may also be shown in cinemas).

· Rollover payments may be made to an artist where the principal has negotiated for an advertisement in which the artist appears to be used beyond the original contract period.

· Where the period of use is extended, the artist will receive an additional fee (rollover payment) equivalent (on a pro rata basis) to the original fee.

· Under clause 9.5.2(c) of the Award the negotiated performance fee does not include any separate, further or later payment made or agreed to be made for the extended or continued period of utilisation of a commercial.

· All property and copyright in the finished advertising material belongs exclusively to the client of the taxpayer or the client's assignee or nominee.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 subsection 6(1).

Superannuation Guarantee (Administration) Act 1992 subsection 11(1).

Superannuation Guarantee (Administration) Act 1992 paragraph 11(1)(d)

Superannuation Guarantee (Administration) Act 1992 subsection 12(8)

Reasons for decision

The SGAA places a requirement on all employers to provide a minimum level of superannuation support for their eligible employees by the quarterly due date, or pay the superannuation guarantee charge. The minimum level of support is calculated by multiplying the charge percentage (currently 9%) by each employee's earnings base.

From 1 July 2008, an employer must use OTE as defined in subsection 6(1) of the SGAA as the earnings base to calculate the minimum superannuation contributions for their employees. This ensures that all employees are treated the same for superannuation purposes.

Definition of ordinary time earnings

OTE, in relation to an employee, is defined in subsection 6(1) of the SGAA and is the lesser of:

(a) the total of the employee's earnings in respect of ordinary hours of work and earnings consisting of over award payments, shift loading or commission, but does not include lump sum payments made on the termination of employment in lieu of unused sick leave and unused annual leave.

(b) the maximum contribution base for the quarter, which is the maximum limit on the amount of superannuation support that an employer is expected to provide for the benefit of the employee. The maximum contribution base for the income year ended 30 June 2010 is $40,170 per quarter.

The Commissioner's views on OTE and salary and wages, as defined in the SGAA, are contained in Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2).

SGR 2009/2 took effect from 1 July 2009 when it replaced Superannuation Guarantee Rulings SGR 94/4 and SGR 94/5 that were applicable up to 30 June 2009.

Salary or wages and OTE

For payments to employees to be considered OTE under subsection 6(1) of the SGAA they must be 'earnings in respect of ordinary hours of work'. Paragraph 12 of SGR 2009/2 specifies that an employee's 'earnings' for the purposes of the definition of OTE is the amount of remuneration paid to the employee as a reward for the employee's services. For superannuation purposes the term 'earnings' means 'salary or wages'.

Subsection 11(1) of the SGAA provides an inclusive definition of the term 'salary or wages'. Under paragraph 11(1)(d) of the SGAA payments to a person for work referred to in subsection 12(8) of the SGAA are specifically included in salary or wages. Paragraph 12(8)(c) of the SGAA includes as employees 'a person who is paid to perform services in, or in connection with, the making of any film, tape or disc or of any television or radio broadcast is an employee of the person liable to make the payment.'

What is significant in the language of these provisions is the use of terms such as 'work', '…to perform services in', and '…in the making of…' This is consistent with the common law interpretation of salary or wages which is normally uses terms such as services, labour, or work performed for an employer for reward.

Therefore, for a payment made to an artist under this award to be considered salary or wages and thus OTE it must be for the performance in the making of the commercial. The payment must be for the work performed, services provided or labour provided in the making of the product, otherwise the payment would not satisfy either the common law definition or the extended definition of salary or wages in the SGAA.

Payments attributable to earnings made from sales and royalties from the finished product subsequent to the initial negotiated performance fee under the award is not attributable to work performed in the making of the commercial. The artist generally does not perform any services for these additional payments described as options and rollovers, so these payments are not in the nature of salary or wages under section 12 of the SGAA.

The options and rollover payments in the Award generally represent payments arising from the finished product (such as the commercial). As such these payments are not for services performed in the making of the product. They are generally royalty or residual type payments to the actors for the rights to use property.

The option and rollover payments do not represent remuneration for work performed which is of the nature described in subsection 12(8) of the SGAA, and therefore do not satisfy the definition of salary or wages provided in Section 11 of the SGAA.

Given the option and rollover payments do not satisfy the definition of salary and wages, then in accordance with paragraph 12 of SGR 2009/2 the payments cannot be considered 'earnings' for superannuation guarantee purposes. Consequently, if the payments are not 'earnings' for superannuation guarantee purposes they will not form part of the ordinary time earnings of the employee.

Negotiated performance fee and OTE

Prior to 1 July 2008, the notional earnings base for SGAA purposes was the 'negotiated performance fee' by virtue of Clause 9 of the Award. Any further or later payment made or agreed to be made or possibly to be made, between the employer and the performer in respect of the extended or continued period of utilization, the extended area of broadcast, or the utilization on additional media, of any advertisement in relation to which the performer is employed was specifically excluded from the definition of negotiated performance fee under subclause 9.5.2(C) of the Award.

Clauses 12 and 13 of the Award specify the artists hours of work and the wording of these clauses enables us to establish a clear link to subclauses 9.5.2, 9.5.2A and 9.5.2B which cover the negotiated performance fee. It is evident from these clauses that the negotiated performance fee is determined with reference to the hours worked by the artist. The negotiated performance fee generally represents remuneration for their labour and is a payment they would receive in relation to each television commercial in which they appear.

On the other hand, option and rollover payments are payments which are negotiated separately (either at the time of signing the original contract or at a later date) and are over and above the negotiated performance fee. Option and rollover payments relate specifically to the extended use of the finished product (filmed commercial), and will only be received by the artist where extended use occurs.

The negotiated performance fee includes amounts which could be attributable to the use of the film for a period, normally 12 months, negotiated and paid around the time of the performance. Although similar in nature to an option or rollover payment these amounts are not distinctly identifiable in the negotiated performance fee and thus are a component of the payment to the artist for his or her performance in the making of the product. Therefore the whole of the negotiated performance fee should form the basis for calculating the artists' OTE.

Subclause 9.5.2(B) of the Award allows the possibility of some payments in respect of overtime, wardrobe calls, retakes and post-synchronization work which are not negotiated as part of the performance fee prior to the engagement, to be excluded from the negotiated performance fee. Except for the overtime, these payments, unlike the options and rollovers, are in the nature of salary or wages under the SGAA as they relate to the artists performance in producing the commercial. Therefore payments (excluding any overtime) made in respect of this subclause are subject to the provisions of the SGAA and thus OTE despite being excluded from the negotiated performance fee.

Conversely, overtime payments are not considered to be OTE, so any payments for overtime should be excluded from the calculation of OTE even if the overtime is included in the negotiated performance fee. However it would appear likely that if the negotiated performance fee did contain an overtime component, it would not be distinctly identifiable or quantifiable. If this is the case, then the whole amount of the negotiated performance fee is OTE.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).