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Edited version of administratively binding advice

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Advice

Subject: Administratively binding advice - ordinary time earnings and allowances

Question 1:

Is the monthly car allowance paid by the employer to its sales employees, to cover the running and maintenance costs of their vehicles, included in the employees' ordinary time earnings (OTE) for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice:

Based on the circumstances that the monthly car allowance paid to sales employees is paid with the reasonable expectation that the allowance will be fully expended in deriving their assessable income, it is not considered to be earnings 'in respect of' the employees' ordinary hours of work, therefore it is not salary or wages and does not form part of the employees' OTE under subsection 6(1) of the SGAA.

Question 2:

Is the monthly car allowance paid by the employer to its non-sales executive employees included in the employees' OTE for the purposes of the SGAA?

Advice:

The monthly car allowance paid to non-sales executive employees is paid to due to their position/standing within the company as part of their salary package. The allowance is not considered to be an expense allowance as it is not expected to be fully expended in deriving their assessable income. It is paid to satisfy an entitlement that accrues as a result of their attending or working during their ordinary hours of work. The allowance is included in salary or wages and forms part of the employees' OTE under subsection 6(1) of the SGAA

This advice applies for the following period/s:

2010-11 income year

The arrangement commenced on

1 July 2010.

Relevant facts and circumstances

The advice is based on the following facts:

The employer has requested clarification regarding its obligation to pay superannuation on the monthly car allowances it pays to its employees.

The monthly car allowance is paid to two groups of employees:

Sales employees who choose not to have a company car but use their own vehicles in performing their work and be paid a standard monthly amount.

Non-sales executive employees who are also provided with a standard monthly allowance as provided for in their individual employment contracts.

The employer expects that the car allowance paid to the sales employees will be fully expended on the running and maintenance of their vehicles.

The allowances paid to both employees are allocated under 'allowances' on the employees' payment summaries.

Both groups of employees are covered under a particular award, however, in respect of the monthly car allowance, their contracts of employment specify the amount of their entitlement. The award is used by the employer as an overriding employment contract and sets out the minimum requirements as far as leave and general employment conditions is concerned.

The employer advised the following in relation to the sales employees:

The monthly car allowance is an all inclusive car allowance. The allowance is paid to cover the employee's costs for loan repayments, registration, insurance, servicing, maintenance, tyres and fuel etc.

On average the salespeople travel approximately 40,000 business kilometres per year.

On average the non-salespeople travel approximately 25,000 business kilometres per year.

The monthly allowance represents, in value, an industry standard.

Reasons for decision

Under the SGAA an employer must provide the required minimum level of superannuation support for its employees by the quarterly due date (unless the employees are exempt employees) 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.

Employers will still be able to use notional earnings bases, such as those specified in legislation or industrial agreements, as the basis for calculating their superannuation support. However, an employer's liability under the SGAA will only be determined with reference to an employee's OTE.

Definition of ordinary time earnings

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

The Commissioner's views on OTE, as defined in the SGAA, are contained in Superannuation Guarantee Ruling SGR 2009/2 (SGR 2009/2).

OTE are generally what employees earn for their ordinary hours of work, including over award payments, commissions, shift loadings, paid leave and allowances (excluding expense allowances) and do not include overtime.

Earnings in respect of ordinary hours of work

For a payment to constitute 'earnings in respect of ordinary hours of work', the payment must be considered 'earnings' of the employee, and the earnings must be paid in respect of the employee's 'ordinary hours of work'.

In the context of the SGAA, the term 'earnings' refers to the remuneration paid to an employee as a reward for the employee's services, the practical effect of this being that earnings means 'salary and wages' (paragraph 13 of SGR 2009/2).

Paragraph 25 of SGR 2009/2 explains what is meant by the phrase 'in respect of ordinary hours of work'. All amounts of earnings in respect of employment are in respect of the employee's ordinary hours of work unless they are remuneration for working overtime hours, or are otherwise referable only to overtime or to other hours that are not ordinary hours of work.

Ordinary hours of work

The meaning of 'ordinary hours of work' is discussed in paragraphs 13 to 18 of SGR 2009/2 and further clarified in paragraphs 189 to 210 of SGR 2009/2.

Paragraph 13 of SGR 2009/2 provides that an employee's 'ordinary hours of work' are the hours specified as his or her ordinary hours of work under the relevant award or agreement, or under the combination of such documents, that governs the employee's conditions of employment.

The document need not use the exact expression 'ordinary hours of work', but it needs to draw a genuine distinction, for the purposes of the award or agreement, between ordinary hours and other hours. In particular, it would be expected that the other hours are remunerated at a higher rate (typically described as overtime) that the ordinary hours, or otherwise identifiable as a separate component of the total pay in respect of non-ordinary hours.

Any hours worked in excess of, or outside the span (if any) of, those specified ordinary hours of work are not part of the employee's 'ordinary hours of work' (paragraph 15 of SGR 2009/2).

Where the 'ordinary hours of work' are not specified in a relevant award or agreement, the ordinary hours of work are the normal, regular, usual or customary hours worked by the employee, as determined in all the circumstances of the case. Where it is not possible or practicable to determine the normal, regular, usual or customary hours of the employee's work, the actual hours worked should be taken to be the ordinary hours of work (paragraphs 16 and 17 of SGR 2009/2).

Allowances and reimbursements

A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the estimated expense. The recipient has the discretion whether or not to expend the allowance. Generally, allowances are salary and wages unless they are considered to be a fringe benefit.

Generally, allowances fall into two categories; an 'expense allowance' and 'other allowance'.

Paragraph 264 of SGR 2009/2 highlights that some allowances ('other allowance') are paid to compensate the recipient for particular working conditions, for example height, dust or danger. On these types of allowances it provides;

These types of allowances are not expended in the course of the employee's work, but rather, are paid as compensation for the conditions applying to the job.

These allowances are included in salary or wages and OTE for superannuation guarantee purposes.

Paragraph 266 of SGR 2009/2 provides the following in respect of an expense allowance:

These allowances are NOT included in salary wages or OTE for superannuation guarantee purposes.

Paragraph 268 of SGR 2009/2 provides that a payment is a reimbursement if the employee is compensated exactly for all or an agreed part of an expense already incurred, although not necessarily disbursed. With reimbursements in general, the employer considers the expense to be its own and the employee incurs the expenditure on behalf of the employer. A requirement that the employee vouch for expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance.

A reimbursement for expenses incurred is paid to compensate the employee rather than a payment made in respect of ordinary hours of work. Reimbursements, therefore, are not included in the definition of OTE for the purposes of the SGAA.

Car allowance paid to sales employees

The monthly car allowance paid to salespeople who use their own vehicles to perform their job is considered to be an expense allowance as it is paid with the reasonable expectation that the allowance will be expended deriving their assessable income.

The allowance is paid to compensate the employees for expenses associated with the use and maintenance of their own vehicles used in the course of their work.

An expense allowance, as discussed in paragraph 266 of SGR 2009/2 is not considered to be earnings 'in respect of' the employees' ordinary hours of work, as it is not given for the services of the employee, but rather in recognition of the expenditure that the employee will incur in the course of providing their services. Therefore it is not salary or wages and does not form part of the employees' OTE under subsection 6(1) of the SGAA.

Car allowance paid to non-sales employees

The car allowance paid to non-sales executive employees is paid to due to their position/standing within the company as part of their salary package, and as they do not require the use of their car for business purposes, is not expected to be fully expended in deriving their assessable income.

The allowance is not considered to be an expense allowance but rather an allowance of the type mentioned above and in paragraph 264 of SGR 2009/2 and it is paid to satisfy an entitlement that accrues as a result of their attending or working during their ordinary hours of work.

The allowance is included in salary or wages and forms part of the employees' OTE under subsection 6(1) of the SGAA.

Conclusion

To constitute OTE for SGAA purposes, a payment must be considered to be earnings in respect of, or in connection with an employee's ordinary hours of work.

As the sales employees are paid a monthly car allowance in recognition that this amount is to cover the estimated monthly expense of the running and maintenance of their vehicles and is paid with the reasonable expectation that it will be fully expended in deriving their income, the allowance is considered an expense allowance and not earnings in respect of their ordinary hours of work. The allowance is not included in the employees' OTE for the purposes of the SGAA.

The monthly car allowance paid to non-sales employees is considered to be an allowance of the type mentioned in paragraph 264 of SGR 2009 ('other allowance'). It is paid to these employees due to their position/standing within the organisation as part of their salary package and is not expected to be expended in the course of their work. The allowance in this case accrues as a result of the recipient attending or working during their ordinary hours of work. Therefore, the allowance is included in the employees' OTE for the purposes of the SGAA.

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