Edited version of your written advice

Authorisation Number: 1051426595501

Date of advice: 27 September 2018

Ruling

Subject: Superannuation guarantee

Question

Are the Project Incentive Payments and Redundancy Payments payable under the Agreement, considered to be Ordinary Time Earnings (OTE) under section 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992)?

Answer

No

This advice applies for the following periods:

Income year ended 30 June 20xx

Income year ending 30 June 20xx

Income year ending 30 June 20xx

The arrangement commences on:

1 July 20xx

Relevant facts and circumstances

You engage employees covered by the Agreement.

The Agreement allows the company to enter into individual flexibility arrangements (the standard employment contract) with the workers.

The standard employment contract can vary the terms of the Agreement in relation to arrangements about when the work is performed and allowances.

The Agreement provides that an employee is entitled to be paid redundancy pay if the employment is terminated at the company’s initiative.

You applied for administrative binding advice concerning whether the payment of a Project Incentive Payment (PIP) and any redundancy/severance pay formed part of ordinary time earnings as defined in subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992.

Included in this application was an extract of the standard employment contract. This extract contained the following relevant provisions concerning the PIP and redundancy/severance payments.

When the Project is completed, the employee’s employment with the employer company ceases and then the employee is paid the PIP and redundancy amounts accrued to them.

When the Project is completed, the employee’s employment with the employer company ceases and then the employee is paid the PIP and redundancy amounts accrued to them.

You received confirmation from the Australian Taxation Office that the project incentive payment and the redundancy/severance pay formed part of an employment termination payment.

You confirmed with us by email that the standard employment contracts were individual flexibility arrangements in accordance with the Agreement.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 Subsection 6(1).

Reasons for decision

Summary

Both the redundancy payments and project inventive payments paid upon termination of employment do not meet the OTE definition stated in subsection 6(1) of the SGAA 1992.

Detailed reasoning

Subsection 6(1) of the SGAA 1992, defines OTE as follows:

(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

C. (Repealed by No 15 of 2007)

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.

The Commissioner’s view on OTE, as defined in the SGAA 1992, can be found in Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms ‘ordinary time earnings’ and ‘salary or wages’.

This ruling explains (at paragraph 12) that 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.

In Abrasiflex Products (WA) Pty Ltd v. Commissioner of State Taxation (WA) 93 ATC 4197; (1993) 25 ATR 325, the Supreme Court of Western Australia considered whether an Eligible Termination Payment fell within the ordinary meaning of wages. White J said:

Payments made to employees or former employees by way of retirement benefits and to compensate for the termination of their employment are, in my opinion, not benefits which can properly be said to be ejusdem generis as wages, salaries, commission, bonuses, or allowances payable to an employee as such. The nature of such benefits is quite different from payments made as a reward for services rendered by an employee to an employer and quite different from the ordinary meaning of the word "wages". See FCT v J Walter Thompson (Aust) Pty Ltd (1944) 69 CLR 227 at 234.

This is consistent with the Commissioner’s views in SGR 2009/2 at paragraph 74 which states that ‘Redundancy payments made on termination of employment are not a reward for services rendered by an employee, even if part of the payment is calculated by reference to the employee’s period of service with the employer. They are payments to compensate the employee for the loss of their job; not a reward for their services.’

Therefore, as the PIP and redundancy/severance pay are paid in consequence of the termination of a person’s employment and not as a reward for services provided to the employer, they are not considered to be OTE for the purposes of subsection 6(1) of the SGAA.

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