Edited version of administratively binding advice

Authorisation Number: 1012372996873

Subject: Vehicle Allowance and Employee bonus

Advice

Question 1

Does a vehicle allowance paid to employees of the employer form part of ordinary time earnings (OTE) under subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice/Answers

Yes. The vehicle allowance paid to employees does form part of OTE under subsection 6(1) of the SGAA. See "Reasons for decision".

Question 2

Does an employee referral payment to an employee who refers another person to the employer form part of OTE under subsection 6(1) of the SGAA?

Advice/Answers

Yes. The employee referral payment to an employee who refers another person, does form part of OTE under subsection 6(1) of the SGAA. See "Reasons for decision".

Facts

The employer operates a business.

The employer pays a travel allowance to employees who use their own vehicles. The allowance does not need to be fully expended or receipted.

The employer agrees to pay its employees a bonus based on the retention of a referred employee. The bonus is based on the retention and performance of the referred employee.

Reasons for decision

Question 1

Summary

The vehicle allowance paid to an employee, does form part of ordinary time earnings (OTE) as defined under subsection 6(1) of the SGAA.

The employer is required to pay superannuation guarantee (SG) on the vehicle allowance payment.

Detailed reasoning

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

Subsection 6(1) of the SGAA defines OTE in relation to an employee to mean:

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

(C) (Repealed by No 15 of 2007)

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

(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.

Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2) explains that an employee's 'ordinary hours of work' are the hours specified as ordinary hours of work under the relevant award or agreement that governs the employee's conditions of employment and highlights that any hours worked in excess of, or outside the span those specified ordinary hours of work are not part of the employee's 'ordinary hours of work'. In particular, the ruling states that:

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 employment and are not OTE because they are not in respect of any particular hours of work.

26. An award or agreement may itself have a definition of 'ordinary time earnings' that purports to apply for superannuation purposes. However, the central question posed by the definition of OTE in the SGAA is what amounts are 'earnings in respect of ordinary hours of work'. This could in some cases be a different amount from any purported amount of 'OTE' in the award or agreement. As mentioned in paragraph 13 of this Ruling, the Commissioner accepts that 'ordinary hours of work' are as determined by the relevant award or agreement, but that does not imply that OTE itself is necessarily as determined by the award or agreement.

Accordingly, in line with the above, all amounts of earnings in respect of employment should be considered to be in respect of the employee's ordinary hours of work unless these are remuneration for overtime or other hours that are not ordinary hours of work.

Allowances

An allowance is a payment of a definite predetermined amount to cover an estimated expense. Generally it is paid regardless of whether the employee incurs the expected expense and the employee has the discretion whether or not to expend the allowance.

Paragraph 27 of SGR 2009/2 relates to certain specific kinds of payments that are OTE. Paragraph 27 states:

Many employees receive various additional payments that are described as allowances that are paid to employees to recognise or compensate for certain conditions relating to their employment. Examples:

· a 'site allowance' paid fortnightly at a flat rate in acknowledgement of the displacement an employee undergoes when a job requires him or her to work in a remote location;

· a 'casual loading' of 20% of the basic ordinary time rate of pay paid to a casual worker in lieu of any fixed, regular minimum hours of work and of paid leave entitlements;

· a 'dirt allowance' paid as a flat rate in acknowledgement of the conditions in which the work is undertaken; and

· a 'freezer allowance' paid at the rate of an extra $2.50 per hour to employees, such as some supermarket employees, who perform most of their duties in cold storage facilities.

These kinds of payments are OTE except to the extent that they:

· are not 'salary or wages', for example if they are payments of a predetermined amount to offset or reimburse particular expenses; or

· relate solely to hours of work other than ordinary hours of work.

Paragraph 65 of SGR 2009/2 relates to certain payments that are 'salary or wages'. Paragraph 65 states:

For the purposes of the SGAA, all allowances, except expense allowances and allowances that are fringe benefits under the FBTAA, received by an employee, are included in 'salary or wages'

Paragraphs 72 of SGR 2009/2 relates to expense allowances and reimbursements and states:

Expense allowances, that is, those allowances paid to an employee with a reasonable expectation that the employee will fully expend the money in the course of providing services are not 'salary or wages'.

Paragraph 266 of SGR 2009/2 which is in the explanation states:

An expense allowance is an allowance which is paid with the reasonable expectation that the money will be fully expended by the employee in the course of providing their services. The expense allowance 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. As this type of allowance does not fall within the ordinary meaning of 'salary or wages', it does not form part of 'salary or wages' for the purposes of section 11. It also does not form part of an employee's OTE.

Paragraphs 259 to 263 of SGR 2009/2 relate to allowances and reimbursements. These paragraphs state:

259. Section 11 does not expressly include in its definition of 'salary or wages' the term 'allowance'. The Commissioner however interprets the expression as used in the SGAA context as extending to the same kinds of allowances that have been regarded as salary or wages under definitions of 'salary or wages' that expressly include allowances.

260. In Mutual Acceptance, the High Court considered whether a fixed weekly payment to employees who used their own motor vehicles in the course of their duties was an 'allowance' and therefore 'wages' as defined the then Commonwealth Pay-Roll Tax Assessment Act 1941-42. The payment represented partial compensation for the motor vehicle expenses to be incurred by those employees.

261. In discussing what may be considered as the ordinary meaning of an 'allowance' Latham CJ in Mutual Acceptance stated that an allowance paid as compensation for unusual conditions of services:

… represents higher wages paid on account of special conditions, and may be fairly described as part of wages in the ordinary sense (emphasis added)

262. Mutual Acceptance was relied upon in Road & Traffic Authority of NSW v. Federal Commissioner of Taxation where the employees received fare allowances under the relevant award for travel to and from work. They were paid regardless of whether or not the employee incurred the expenditure. The question for decision was whether the allowances were expense payment benefits subject to fringe benefits tax or were within the definition of 'salary or wages' in former subsection 221A(1) of the ITAA 1936.

263. Hill J considered the allowance as additional compensation to the employees for their services. There was no need that the remuneration relate to specific services rendered, as long as the payments in question were given as remuneration for services generally. The fare allowances had no relationship to the actual cost of travel incurred by the employees. Accordingly, they were not reimbursements. The fare allowances were held to be 'salary or wages'.

Therefore, in order for vehicle allowances to be deemed an expense allowance it is necessary to establish whether there is a reasonable expectation that the employee will fully expend the money in the course of providing services. If an allowance is paid unconditionally, that is regardless of whether the employee actually incurs the cost, it suggests that the allowance is not an expense allowance.

The vehicle allowance has no relationship to the actual costs incurred by the employees. An employee is entitled to receive the vehicle allowance and is free to spend as the employee wishes. Accordingly, the vehicle allowance is not a reimbursement and forms part of the salary and wages of the employee. It is a flat payment amount and the amount is not calculated by reference to the employee's vehicle type.

The vehicle allowance does not have the characteristics of an expense allowance because it is paid to employees unconditionally and regardless of whether the employee actually incurs the cost. In addition, it is paid to employees as a set amount each month when they choose to use their own vehicle.

The vehicle allowances paid to employees are a reward for services they provide as an employee. The employees are entitled to receive and keep the vehicle allowances regardless of whether they incur any expense in respect of the stated purpose of the vehicle allowance. Therefore, the vehicle allowance forms part of the salary or wages of the employee. The vehicle allowance is not referrable to services provided by the employees outside of their ordinary hours of work. Therefore, the vehicle allowances are earnings 'in respect of ordinary hours of work' and are ordinary time earnings.

Question 2

Summary

The employee bonus paid to an employee, does form part of OTE as defined under subsection 6(1) of the SGAA.

The employer is required to pay SG on the bonus.

Detailed reasoning

Bonuses

Paragraph 66 of SGR 2009/2 relates to certain payments that are 'salary or wages' and states.

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, in respect of their employment, would the Commissioner accept that the payment is made on a personal basis and so is not salary or wages for SGAA purposes…

Paragraphs 28 and 29 of SGR 2009/2 relate to certain specific kinds of payments that are OTE and state:

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.

Example 21 of SGR 2009/2 is in relation to a performance bonus

Tamara is an adviser at a finance company. At the end of the year, Tamara receives a bonus of $5,000, which the employer says is for her exceptional work and results during the year, and also for the long hours which she has had to work.

The payment made to Tamara is a reward for her services as an employee and is therefore salary or wages.

The bonus received by Tamara is a reward for the services she has provided to her employer. Therefore, the bonus is "earnings" for the purposes of the definition of OTE.

The earnings are "earnings in respect of ordinary hours of work". Although the bonus is said to recognise both her ordinary service and the long hours she has had to work, it is sufficiently connected with ordinary hours to be OTE. The Commissioner does not accept that such bonus payments can be dissected into an OTE component and "overtime" payments.

Example 22 of SGR 2009/2 is in relation to a bonus described as ex-gratia but paid in respect of ordinary hours of work

Nancy is an employee of Tangerine Ltd. As an employee, Nancy was entitled to receive a bonus payment which was labelled an "ex gratia payment" by the employer. This bonus was paid out of a pool of funds from revenue generated by the work completed by the employees. In order to qualify for payment of the bonus, Nancy was required to achieve a minimum monthly revenue target. However, the employer was also able to exercise discretion to withhold the bonus on disciplinary grounds or pay a bonus to employees who did not meet the minimum monthly target. Payments were made in recognition of the hard work of the staff.

The payment made to Nancy is a reward for her services as an employee. Although the bonus payment is labelled an ex gratia payment, and is indeed gratuitous in as much as the employer does not necessarily have to pay it, this does not stop it from being salary or wages. There is a causal connection between the payment and the work completed by employees. The payment is not a personal gift unrelated to any work performed. The payment is therefore "salary or wages".

The bonus is not solely referable to hours of work outside ordinary hours. Therefore, the bonus payment is "in respect of ordinary hours of work" and is therefore OTE.

Example 23 of SGR 2009/2 is in relation to a Christmas bonus

Suzie is an employee of JJ Pty Ltd. At the end of the year, the company gives her what is described as a Christmas gift of $250 in cash. It is said to be a Christmas bonus paid to Suzie as an expression of the company's goodwill. It is said to be not related to Suzie's performance at work.

On these facts, the Commissioner would treat the payment made to Suzie as salary or wages. In the absence of clear evidence to the contrary, the payment would be seen as in substance given as a reward for services provided in respect of her work despite the label which has been given to the payment. Only in rare cases, as where the payment is very small, or there is a family or other clear private connection between employer and employee, would the Commissioner entertain any suggestion that payments like this are not salary or wages. For income tax purposes, the payment would be regarded as salary assessable in Suzie's hands. In the same way, it is regarded as salary or wages for SGA Act purposes.

The bonus is not solely referable to hours of work outside ordinary hours. Therefore, the bonus payment is "in respect of ordinary hours of work" and is OTE.

Paragraphs 275 to 277 of SGR 2009/2 further address bonuses.

Paragraph 274 of SGR 2009/2 explains that a bonus is salary and wages if the bonus is paid to an employee not on a personal basis but because of their services as an employee.

Paragraph 275 of SGR 2009/2 makes reference to Prushka Fast Debt Recovery Pty Ltd v. Commissioner of Taxation [2008] AATA 762 and states:

In Prushka , which involved payments to employees from a profit sharing bonus scheme based on specified revenue targets achieved, Tribunal Member Fice made the following fact findings: ... the bonuses paid by Prushka were clearly paid in an employment context and by reference to the specific performance of its employees as a group.

Relevant legislative provisions

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

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