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Edited version of your written advice
Authorisation Number: 1012733617826
Advice
Subject: Ordinary time earnings
Question 1
Is the incentive bonus payment paid to your employees ordinary time earnings for the purposes of subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?
Advice/Answers
Yes, please see 'Reasons for decision'.
The arrangement commences on:
After 1 July 2014
Relevant facts and circumstances
You wish to make a bonus payment to your employees. The payment is an incentive payment.
The payment is not directly related to hours of work but is not paid for overtime.
You intend to withhold tax from this payment and you view the amount as a part of the employees' salary.
Relevant legislative provisions
Superannuation Guarantee (Administration) Act 1992 section 6(1)
ATO View documents
Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages'
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.
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.
The Commissioner's views on OTE are included in Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages'. (SGR 2009/2).
Paragraphs 28 and 29 of SGR 2009/2 relate to bonus payments:
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.
Paragraphs 274 to 278 of SGR 2009/2 provides further clarification of the Commissioner's view on bonuses:
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.
275. 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.
276. Accordingly, it was held that the payments were OTE as well as 'salary or wages' for superannuation guarantee purposes. A bonus that is a 'retention payment' is not based on the performance of the individual, but rather there is a contractual right to the bonus if the relevant individual has been employed for the full year and remains employed at the payment date. The payment is primarily designed to ensure retention of staff.
277. These are no different from other kinds of bonus. They are a form of remuneration for services rendered and would be assessable as income in the hands of the employee. Therefore, a retention payment is 'salary or wages'.
278. A 'sign-on' bonus is salary or wages if it is assessable income in the hands of the employee for income tax purposes. Only in limited situations would the Commissioner accept that such a payment is not assessable income, as where the payment is clearly referable to a separate restrictive covenant entered into by the employee: see Income Tax Ruling IT 2307.
Therefore it is necessary to determine if a bonus payment is made to an employee on the basis of their services as an employee or whether it is made to them on a personal basis. Where it is made to the employee on the basis of their service as an employee, and the amounts are not referable to overtime, the payment will be OTE.
Application of the law to your circumstances
You are paying your employees a bonus payment.
You have stipulated that you view the payment as a taxable payment and that tax is being withheld from it. As per paragraph 274 of SGR 2009/2, this confirms that the payment is made in relation the employees' services as your employees and not on a personal basis.
Therefore, even though the payment is not in relation to actual hours of work, it is considered to be a payment in relation to the employment conditions under which the employees are engaged.
As per paragraph 25 of SGR 2009/2 there cannot be payments that are made for employment generally which are not OTE, unless they are in relation to overtime.
Accordingly, the incentive bonus payment is considered ordinary time earnings for the purposes of subsection 6(1) of the SGAA.
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