Edited version of administratively binding advice

Authorisation Number: 1012600830559

Advice

Subject: Ordinary time earnings

Question 1

Does overtime payments you make for your employees form part of ordinary time earnings (OTE) for the purposes of subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

No. Please refer to 'Reasons for decision'.

Question 2

Does the travelling allowance paid to your employees form a part of OTE for the purposes of the SGAA?

Advice

Yes. Please refer to 'Reasons for decision'.

The arrangement commences on:

After 1 July 2013

Relevant facts and circumstances

You have an agreement with your employees in which ordinary hours are established. Ordinary hours are a certain amount of hours a week and any hours worked in excess of these hours are overtime and are paid at a higher rate.

You pay your employees a travelling allowance. The allowance is based on the travelling allowance in the Award but is paid at a higher rate. You have informed us that the allowance is not a fringe benefit amount and is paid unconditionally when an employee is required to stay somewhere overnight. They do not have to necessarily expend the allowance.

Relevant legislative provisions

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

Detailed reasoning

From 1 July 2008, all employers must use OTE as the earnings base to calculate the minimum super guarantee contributions required for your employees.

The phrase 'ordinary time earnings' is defined in subsection 6(1) of the SGAA as 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.

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.

OTE is usually the amount an employee earns for their ordinary hours of work. It includes commissions, shift-loadings and some allowances, but does not 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 expression 'earnings in respect of ordinary hours of work' or any of the terms in that expression are not defined in the SGAA. The Commissioner's view on the meaning of these phrases is expressed in the following paragraphs of SGR 2009/2 as follows:

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.

14. 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) than the ordinary hours, or otherwise identifiable as a separate component of the total pay in respect of non-ordinary hours

15. 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'.

16. If 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. This is not necessarily the minimum or maximum number of hours worked or required to be worked.

17. In such cases, it may often not be possible or practicable to determine the normal, regular, usual or customary hours of an employee's work. If so, the actual hours worked should be taken to be the ordinary hours of work.

18. 'Ordinary hours of work' are not necessarily limited to hours to be worked between 9am and 5pm, Monday to Friday. 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.

Paragraphs 41 of SGR 2009/2 outline that overtime earnings are specifically excluded in definition of OTE:

41. Payments for work performed during hours outside an employee's ordinary hours of work are not OTE.

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. Paragraph 72 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'.

Paragraphs 259 to 263 of SGR 2009/2 which are in the explanation section of the ruling 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 Tas 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'.

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.

Application to your circumstances:

Question 1

In your case you have an agreement with your employees where any hours worked in excess of a certain amount of hours are overtime hours. As per paragraph 14 of SGR 2009/2 these hours are described as overtime and they are also paid at a higher rate. Earnings from these hours are earnings in respect of overtime. Therefore according to paragraph 41 of SGR 2009/2 earnings from these hours are not OTE.

Question 2

In order for a travel allowance 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.

In your case you pay your employees a travel allowance. You have informed us that this payment is not a fringe benefit amount. Furthermore, you pay the amount when an employee stays somewhere overnight regardless of whether they expend the amount. As the allowance is paid unconditionally upon an employee staying overnight it is not an expense allowance.

As the allowance is not a fringe benefit or an expense allowance the amount is 'salary or wages' and is also OTE.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).