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Edited version of your written advice
Authorisation Number: 1012811831719
Ruling
Subject: Shares - Super Guarantee
Question
Are deferred shares and options granted to an employee as part of an annual bonus considered ordinary time earnings (OTE) or salary and wages for the purposes of subsection 6(1) of the Superannuation Guarantee Administration Act 1992 (SGAA)
Advice
No. Shares are not considered salary or wages for superannuation guarantee (SG) purposes. As a result, they are not included as OTE.
Relevant facts and circumstances
• The employer issues share options and deferred shares as part of a senior executives annual bonus under their Employee Share Scheme (ESS).
• Payroll tax is imposed on an employer in relation to wages. Wages include the value of shares and options under an ESS given to employees and directors for tax purposes.
• Bonuses are generally included in the OTE and subject to SG contributions, although the acquisition of a share or of a right to acquire a share, under an ESS is excluded from the definition of OTE in Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2).
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 9.5%) 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. If the correct amount of superannuation is not paid by the cut off dates stipulated by legislation, then the employer is liable to pay superannuation guarantee, not only on an employee's OTE, but on their salary and wages.
SGR 2009/2 stipulates the Commissioner's view on what is regarded as OTE and salary and wages for superannuation guarantee purposes.
As per paragraphs 28 and 29 of SGR 2009/2, the Commissioner considers in most cases that bonuses and similar payments based on performance are considered OTE, and therefore form part of salary and wages.
Employees are recognised for their achievements of contributing to the company's profit by being offered an increase in salary for the upcoming year, as well as a cash bonus and deferred share option.
The performance bonus consists of a one-off cash performance bonus and a Deferred Share Plan bonus. Shares are awarded on a certain date, but an employee can only access 50% of the shares after an additional 2 years, with the remaining 50% entitled for release after 3 years.
Paragraph 46 of SGR 2009/2 states that fringe benefits and other non-cash payments are not considered salary and wages, and therefore cannot be OTE. Paragraph 58 extends on this exclusion and states:
'Fringe benefits as defined in the Fringe Benefits Tax Assessment Act 1986 (FBTAA) are excluded under subsection 11(3) of the SGAA.5 Additionally, the Commissioner takes the view that other 'benefits', within the meaning of the FBTAA, given by employers to employees that are neither fringe benefits nor salary or wages within the meaning of that Act are not salary or wages for SGAA purposes. For example:
• contributions made by an employer to a complying superannuation fund for the benefit of an employee (including those required to be made by the superannuation guarantee legislation itself); and
• the acquisition of a share, or of a right to acquire a share, under an employee share scheme (within the meaning of Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)),
are not salary or wages for SGAA purposes.'
Therefore, as the once only cash performance bonus is considered OTE, SG is payable on that component of the performance payment. However, by virtue of the second dot point outlined above, share payments (including deferred share payments) are specifically excluded from an employee's salary and wages and therefore cannot form part of an employee's OTE.
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