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Subject: Ordinary time earnings
Question
Is the Employer required to include an Agreement defined bonus in ordinary time earnings (OTE) in accordance with subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA) for the purpose of calculating the minimum level of superannuation support required for employees under the SGAA?
Advice
Yes, please refer to 'Reasons for decision'.
The arrangement commences on:
After 1 July 2009
Relevant facts and circumstances
The Employer operates under an Agreement ratified by Fair Work Australia which includes clauses providing for payment of a bonus.
Relevant legislative provisions
Superannuation Guarantee (Administration) Act 1992 subsection 6(1)
Reasons for decision
Summary
The Employer is required to include the bonus as defined in the Agreement, in OTE as defined in subsection 6(1) of the SGAA for the purpose of calculating the minimum level of superannuation support required for employees under the SGAA.
Detailed reasoning
Overview
From 1 July 2008, all employers must use OTE as the earnings base to calculate the minimum super guarantee contributions required for your employees.
From 1 July 2008, employers may still be required to use notional earnings bases specified in legislation or industrial agreements as the basis of their superannuation support in cases where these are above an employee's OTE, but SGAA obligations will only be assessed against OTE.
OTE is usually the amount an employee earns for their ordinary hours of work. It includes commissions, shift-loadings and some allowances, but doesn't include overtime payments. Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2) provides further guidance on what constitutes OTE.
The phrase 'ordinary time earnings' is defined in subsection 6(1) of the SGAA follows:
ordinary time earnings, in relation to an employee, 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.
(emphasis added)
In broad terms (and subject to some exceptions), OTE of an employee means earnings in respect of ordinary hours of work. Payments for work performed outside the ordinary hours of work, such as overtime payments, are not OTE.
The expression 'earnings in respect of ordinary hours of work' or any of the terms in that expression are not defined in the SGAA. For the income year ended 30 June 2010 and later income years the Commissioner's view on the meaning of these phrases is expressed in the following paragraphs of SGR 2009/2 as follows:
12. An employee's 'earnings', for the purpose of the definition of OTE, is the remuneration paid to the employee as a reward for the employee's services. The practical effect for superannuation guarantee purposes is that the expression 'earnings' means 'salary or wages'.
13. 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.
25. 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. There is no such thing as earnings that are merely in respect of employment generally and are not OTE because they are not in respect of any particular hours of work.
Further clarification of bonuses is provided in paragraphs 28 and 29 of SGR 2009/2 as follows:
28. Additional earnings received as a reward for good performance, and other like 'bonus' payments, are OTE in most cases. Exceptionally, a discrete and clearly identifiable bonus payment may relate solely to work performed entirely outside ordinary hours. For example, an employer may pay a bonus specifically to recognise a special project that an employee contributed to entirely in non-ordinary hours.
29. 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 at least partly referable to results achieved in ordinary hours of work is wholly OTE.
Application to your circumstances:
The relevant features of the bonus clause are that the clauses/sub-clauses of the Agreement allow for the employee to fund a range of options.
The bonus accrues on the basis of completed months of service. Those completed months of service may or may not have an overtime component. However, paragraphs 28 and 29 of SGR 2009/2 refer specifically to bonuses and the consideration that bonus payments partly referable to results achieved in ordinary hours of work being wholly OTE.
The bonus is an after-tax payment made to employees who may then use it to fund a range of options. Under a clause of the Agreement, one of those options is for paid time release to maintain full salary while the employee works reduced hours. Under this option the employee's bonus will still be calculated on the same accrual basis, however the ordinary hours of work will reduce. This reduction will have no effect on the inclusion of the bonus as part of OTE because the nexus, indicated in paragraph 29 of SGR 2009/2, remains between the payment of the bonus and ordinary hours of work.
The decision as to whether the bonus is to be included in OTE is based on a consideration of whether the bonus payment made by employer meets OTE as defined in subsection 6(1) of the SGAA, rather than a consideration of the subsequent choice made by the employee in respect of expenditure options.
The calculation of the bonus would be determined in accordance with the Agreement and associated employer policy. That whole amount would then form part of OTE.
The bonus is considered to be OTE for the purposes of the SGAA.
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