Edited version of administratively binding advice

Authorisation Number: 1011832461872

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Advice

Subject: Bonuses and ordinary time earning

Do bonus payments made to the employees under the terms of an Agreement meet the definition of 'ordinary time earnings' in subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

Yes. The staff bonus payments do meet the definition of 'ordinary time earnings' (OTE) in subsection 6(1) of the SGAA. Please see 'Reasons for decision'.

Question 2

If the staff bonus payments meet the definition of OTE, is the employer liable to make superannuation contribution for all bonus payments made between 1997 and 2009?

Advice

Yes. As the bonuses form part of the OTE, the employer has to ensure that the minimum superannuation contributions were made in respect to all OTE between 1997 and 2009.

This ruling applies for the following periods:

Year ending 30 June 1997

Year ending 30 June 1998

Year ending 30 June 1999

Year ending 30 June 2000

Year ending 30 June 2001

Year ending 30 June 2002

Year ending 30 June 2003

Year ending 30 June 2004

Year ending 30 June 2005

Year ending 30 June 2006

Year ending 30 June 2007

Year ending 30 June 2008

Year ending 30 June 2009

The scheme commences on:

1 July 1996

Relevant facts and circumstances

This advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on Tax Office advice.

Your advice is based on the following facts.

· The organisation operates under an Agreement.

· Agreement contains clauses for the payment of a bonus to staff in certain circumstances determined by the organisation's financial performance. It also details how the bonus is calculated and to whom it is paid.

· The relevant clauses the Agreement states:

(a) Applicability - the bonus payment relates to organisation's financial performance in 2009/2010. This performance will be determined by the results of the audited financial statements….

(b) Payment - the payment of any bonus for this stage will be made to staff after financial accounts have been prepared, verified, audited and published.

(c) Eligibility - Organisation's staff will be eligible to receive this bonus payment if The incremental adjustment to retained profit for the relevant financial year exceeds the approved budgeted amount, before any of the following:

i. Adjustment for changes to or implementation of accounting policies;

ii. Acquisitions or relinquishment of net assets;

iii. Transfers to or from reserves; and

iv. Any abnormal or extraordinary items.

This is titled "excess incremental adjustments".

If the requirements for a full bonus payment are deemed to not have been achieved, then the Single Bargaining Unit shall meet to determine the full circumstances and an appropriate course of action.

Payment Details

(a) A bonus payment will be made on the following basis:

· 50% of the "excess incremental adjustment" to retained profit, if any, as defined in sub-paragraph (c) will be distributed equally among staff;

· "staff" is defined as staff engaged on a permanent, temporary or casual basis during the relevant financial year;

· staff engaged for only a portion of the financial year in question shall receive a pro-rata bonus payment;

· part-time staff shall receive a pro-rata bonus payment appropriate to the terms of their part-time engagement'

· this payment will be uncapped i.e. with no upper limit; and

· Additional parameters to clarify the eligibility status of staff for this bonus payment may be determined by the organisation's committee.

· The hours of work are defined as follows:

1) (a) standard day shall be 7.25 hours (b)Ordinary hours of work shall be an average of 36.25 per week.

2) The ordinary working hours of all full time permanent and temporary employees inclusive or exclusive of meal times as the case may be shall not exceed ten hours per day and shall be worked between the hours of 7.00am to 7.00pm Monday to Friday inclusive,

· These bonuses have been paid to the organisation's employees since the 1996-97 financial year under various Agreements. However, they have not been included when calculating the employees' ordinary time earnings for the purpose of superannuation guarantee.

The organisation has always used OTE in calculating their superannuation guarantee liabilities, even prior to 1 July 2008.

Taxpayer contentions

· At the time the bonus payments were made, they were not included in the ordinary time earnings calculation for the purposes of making superannuation contribution because an agency, which provides payroll services for the organisation, formed the view that it did not consider that the organisation's bonus payment should be included in the ordinary time earnings calculation as the payment of the bonus is based on the performance of the organisation as a whole, rather than on individual performance.

· However, this interpretation came into question when the ATO issued Superannuation Guarantee Ruling - SGR 2009/2, Superannuation Guarantee: meaning of terms 'ordinary time earnings' and 'salary and wages'.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 subsection 6(1)
Superannuation Guarantee (Administration) Act 1992 section 23

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. SGR 2009/2 took effect from 1 July 2009 when it replaced SGR 94/4 Superannuation Guarantee Rulings Ordinary time earnings (SGR 94/4) and SGR 94/5 Superannuation Guarantee Rulings Salary or wages which were applicable prior to 30 June 2009.

Generally, OTE are what employees earn for their ordinary hours of work, including over award payments, shift loadings, commissions and allowances (excluding expense allowances).

Therefore, in the present case, it is necessary to determine whether the bonus payments made to Project Services' employees were earnings in respect of ordinary hours of work

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 in respect of the employee's ordinary hours of work.

An employee's earnings for the purposes of the definition of OTE in the SGAA is the remuneration paid to the employee as a reward for the employee's services.

Paragraphs 11 of SGR 94/4 and 25 of SGR 2009/2 explain 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 referrable to overtime hours 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 7 to 10 of SGR 94/4 and 13 to 18 of the SGR 2009/2. These are summarised below:

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 does not need to use the exact expression 'ordinary hours of work', but it needs to make a genuine distinction, for the purposes of the award or agreement, between ordinary hours and other hours. 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.

In cases, where it is not possible or practicable to determine the normal, regular, usual or customary hours of an employee's work it is the actual hours worked that are taken to be the ordinary hours of work.

'Ordinary hours of work' are not limited to hours to be worked between 9am and 5pm, Monday to Friday as they may (depending on the provision in the relevant award or agreement, if any) include hours to be worked at other times, including at night, on weekends or on public holidays.

Application of the law and SGR 2009/2 to your case

Question 1

Bonuses

Paragraphs 24 of SGR 94/4 and 274 of SGR 2009/2 provide that bonuses will form part of an employee's OTE where it is paid in respect of ordinary hours of work.

Paragraph 274 of SGR 2009/2 explains:

274. A bonus is 'salary or wages' if it is paid to an employee by reason of their services as an employee and not on a personal basis. Only in those very limited cases in which the Commissioner would accept that the payment is not assessable income of the employee for income tax purposes would the Commissioner accept that the payment is made on a personal basis and so is not salary or wages, and therefore not OTE, for SGAA purposes

However, paragraph 25 of SGR 94/4 indicates that bonuses paid in relation to overtime would not form part of an employee's OTE.

Furthermore, paragraphs 28 to 29 of SGR 2009/2 also conclude that some bonus payments may be clearly identifiable to work performed outside of ordinary hours, such as for a special project. However, there would need to be clear evidence that this was the sole basis for the payment. The more common case of a lump sum performance bonus that is a least partly referrable to results achieved in ordinary hours of work is wholly OTE.

In this case, the Agreement states that the bonus payment relates to the organisation's financial performance in the relevant financial year.

From the facts provided we can see that the payment of bonus is based on achieving a corporate outcome. It is clear that the payment of bonus is not made on a personal basis. There is also no clear indication that the bonuses were solely based on work performed outside of ordinary hours of work.

Paragraph 274 states that the Commissioner will only accept in very limited cases that bonus is made on personal basis and is not salary or wages, and therefore not OTE for SGAA purposes. In Prushka Fast Debt Recovery Pty Ltd v. Commissioner of Taxation [2008] AATA 762, the Administrative Appeals Tribunal (AAT) determined that bonus payments to employees from a profit sharing scheme based on achieving specified revenue targets does form part of the employee's OTE. This is very similar to the current case where the payment of bonus is based on the corporate performance of the organisation.

Therefore it must be concluded that the bonus payment does meet the definition of OTE in subsection 6(1) of the SGAA.

Question 2

Superannuation contributions for bonus payments

You have asked us whether the organisation is liable to make superannuation contribution for all bonus payments made between 1997 and 2009. You have provided all the copies of the relevant Agreements during this period: You also informed us that the organisation had always used OTE to calculate your liabilities in relation to your employees' superannuation guarantee, even prior to 1 July 2008.

In accordance with section 23 of the SGAA, an employer's charge percentage (currently 9%) is reduced by the level of contributions paid on behalf of an employee on the relevant earnings base. As previously determined, the relevant earnings base for the organisation is OTE both before and after 1 July 2008.

After looking at all of the Agreements, the clauses relating to the bonus payments seem to have remained relatively unchanged with all the clauses being similar to the wordings used in the Agreement 2009. This means that payment of bonuses, from 1997 to 2009, were always dependent upon the organisation achieving a corporate outcome and not strictly referrable to any overtime work.

Although SGR 2009/2 took effect from 1 July 2009, the case of Prushka Fast Debt Recovery Pty Ltd v. Commissioner of Taxation was made by the AAT prior to the ruling and looked at the definition of ordinary time earnings and underlying objective of the SGAA. This means that the same case law principle we have applied in Question 1 will apply to all bonus payments and should be included as part of the employees' OTE for the purpose of calculating the superannuation guarantee liability.

As determined by the facts, the organisation has not made any contributions on behalf of its employees in relation to the bonus payments made during the period between 1997 and 2009.

Therefore, the organisation's charge percentage is not reduced in accordance with section 23 of the SGAA and it is now liable to make superannuation contribution for all bonus payments made between 1997 and 2009.

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