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Edited version of administratively binding advice

Authorisation Number: 1011810570896

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Advice

Subject: Request for Administratively Binding Advice on Superannuation Guarantee obligations

Question 1

Will the contribution of funds by the company X to an employee share trust (EST) for the purposes of the EST acquiring shares either on market or via a new issue to allocate to employees of a related company XY under the terms of an employee bonus share plan (EBSP) constitute ordinary time earnings as defined in subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Answer

The contribution of funds by Company X to the EST for the purpose of acquiring shares to be allocated to Company XY employees, does not constitute ordinary time earnings for Company XY employees as defined in subsection 6(1) of the SGAA.

Question 2

Will the allocation of shares in Company X to employees of Company XY under the terms of the EBSP constitute ordinary time earnings as defined in section 6 (1) of the SGAA?

Answer

The allocation of shares in Company X to employees of Company XY under the terms of the EBSP does not constitute ordinary time earnings as defined in subsection 6(1) of the SGAA.

This advice applies for the following periods:

Period ending 30 June 2012

Period ending 30 June 2013

Period ending 30 June 2014

Period ending 30 June 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Company X is an Australian listed company, and Company XY is a related company of X.

Company X offers certain employees and executives, payment of cash and shares upon satisfaction of certain performance conditions as part of its overall remuneration strategy. This is implemented through various employee incentive plans including the EBSP that is the subject of this application.

Currently, the EBSP forms part of the Company X Staff Incentive Plan (SIP).

The SIP guides all permanent Company X employees in determining their eligibility to receive a cash incentive payment and the election available to instead receive the incentive payment as shares in Company X.

The purpose of the EBSP is to provide eligible employees with an opportunity to acquire an ownership interest in Company X.

Employees of the Company X are employed by either the Company X itself, or its related companies Company XZ and Company XY. The EBSP applies to employees of Company X, Company XZ and XY.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A.

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

Superannuation Guarantee (Administration) Act 1992 Subsection 11(3).

Reasons for decision

An employers individual superannuation guarantee shortfall for an employee for a quarter is calculated using the formula of the total salary or wages paid by the employer to the employee for the quarter multiplied by the current charge percentage for the employee for the quarter. Under Section 11(3) of the SGAA, fringe benefits within the meaning of the Fringe Benefits Tax Assessment Act 1986 are not salary and wages for the purposes of the SGAA.

Ordinary time earnings (OTE), in relation to an employee, is defined in Section 6(1) of the SGAA. It means:

(a) the total of:

(i) earnings in respect of ordinary hours of work other than earnings consisting of a lump sum payment of any of the following kinds made to the employee on the termination of his or her employment:

(A) a payment in lieu of unused sick leave;

(B) an unused annual leave payment, or unused long service leave payment, within the meaning of the Income Tax Assessment Act 1997; and

(ii) earnings consisting of over-award payments, shift-loading or commission; or

(b) if the total ascertained in accordance with paragraph (a) would be greater than the maximum contribution base for the quarter-the maximum contribution base.

The Commissioner's current view on what represents OTE is contained in Superannuation Guarantee Ruling 2009/2. This ruling confirms that an amount can only be part of an employee's OTE if it is 'salary or wages' of the employee (at paragraph 7). Paragraph 58 identifies that fringe benefits and other non-cash benefits are payments excluded from the definition of 'salary or wages':

Fringe benefits as defined in the Fringe Benefits Tax Assessment Act 1986 (FBTAA) are excluded under subsection 11(3) of the SGAA. Additionally, the Commissioner takes the view that other 'benefits', within the meaning of the FBTAA, given by employers to employees that are neither fringe benefits nor salary or wages within the meaning of that Act are not salary or wages for SGAA purposes. For example:

In relation to Question 1, Company X intends to contribute funds to the EST to purchase shares to allocate to employees of Company XY under the terms of the EBSP. The EST is an employee share scheme within the meaning of Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) (formerly Division 13A of Part III of the ITAA 1936). Company X acquiring shares under an employee share scheme for allocation to Company XY employees under the EBSP is not salary or wages for SGAA purposes and therefore not OTE either, as a payment cannot be OTE if it is not considered to be salary or wages.

In relation to Question 2, under the EBSP, eligible employees are provided with an opportunity to acquire an ownership interest in the plan. If an employee's application for allocation of shares is approved by the Board in accordance with the rules of the plan, the Board instructs the trustee to acquire and/or allocate the appropriate number of shares to be held by the trustee on behalf of the participant. The trustee is the appointed trustee of the company's EST. As outlined in the reasoning for Question 1 in this decision, the EST is an employee share scheme within the meaning of Division 83A of the ITAA 1997 (formerly Division 13A of Part III of the ITAA 1936). The allocation of shares under the terms of the EBSP to related company employees is not salary or wages for SGAA purposes and therefore cannot be considered as OTE.

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