Edited version of administratively binding advice

Authorisation Number: 1011618553422

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Subject: Ordinary time earnings and payment in lieu of consideration period

Should payments in lieu of consideration period to employees of the organisation be treated as ordinary time earnings (OTE) for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA) ?

Payment in lieu of consideration period paid to employees of the organisation should be treated as OTE except for the amounts of the payment relating to annual leave and long service leave in accordance with subsection 6(1) of the SGAA.

This advice applies for the following period:

Income year ended 30 June 2011

The arrangement commences on:

1 July 2010

Relevant facts and circumstances

This advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on Tax Office advice.

The Employer, is party to a collective agreement (the Agreement)

The Agreement is made under section 328 of the Workplace Relations Act 1996 (WR Act)

The Agreement states the terms and conditions of employment of the employees covered by the Agreement other than terms and conditions applying under a relevant Commonwealth law or implied at common law.

A copy of the agreement has been provided.

Taxpayer contentions

In regard to the interpretation of the Superannuation Guarantee Ruling (SGR 2009/2) you wish confirmation or clarification of the following issue.

In accordance with the Agreement, employees that request an earlier termination date that falls within the discussion and consideration period, the employee will be entitled to receive payment for the unexpired portion of the discussion and consideration period. In addition, the payment in lieu of the unexpired portion of the discussion and consideration period will include an amount equivalent to the Annual Leave and Long Service Leave entitlements that would have accrued to the employee had they worked through their discussion and consideration period.

In your application, you advised the consideration period is two months. Further, you provided an example in your application for occasion when the Company offers employees, payment in lieu of consideration period, as follows:

Date of offer is 30 June 2010

If the employee elects 30 June 2010 they receive the full entitlement (1 July 2010 to 30 August 2010)

If the employee elects 30 July 2010 they receive a reduced payment (31 July 2010 to 30 August 2010).

During a phone conversation with your employee and an Australian Taxation Office (ATO) Officer, you advised that it was your understanding that 'payment in lieu of notice' and 'payment in lieu of consideration' are of a similar nature but you were seeking confirmation.

Relevant legislative provisions:

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

Superannuation Guarantee (Administration) Act 1992 Section 16

Reasons for decision

Under section 16 of the SGAA, a superannuation guarantee charge (SGC) imposed on an employer's superannuation guarantee shortfall for a quarter is payable by the employer. An employer can reduce their liability to the SGC by making superannuation contributions as a specified percentage of each of their eligible employees' notional earnings base by the due dates in the SGAA.

The Superannuation Laws Amendment (2004 Measures No 2) Act 2004 simplified the earnings base of an employee for SGAA purposes. These amendments which apply from 1 July 2008 have the effect that all employers need to calculate their SGAA liability against an employee's OTE, as defined in the SGAA.

In effect this means employers can no longer use earnings bases specified in industrial awards, superannuation schemes, occupational superannuation arrangements or a law of the Commonwealth, State or Territory to satisfy their requirements in meeting their SGAA liability.

From 1 July 2008, employers may still be required to use notional earnings bases specified in legislation or industrial agreements as the basis of their superannuation support in cases where these are above an employee's OTE, but SGAA obligations will only be assessed against OTE.

OTE, in relation to an employee, is defined in subsection 6(1) of the SGAA and is the lesser of:

· the total of the employee's earnings in respect of ordinary hours of work and earnings consisting of over award payments, shift loading or commission, but does not include lump sum payments made on termination of employment in lieu of unused sick leave, unused annual leave and unused long service leave, or

· the maximum contribution base for the quarter - the maximum contribution base , which is the maximum limit on the amount of superannuation support that an employer is expected to provide for the benefit of an employee. The maximum contribution base for the 2008/09 year of income is $38,180 per quarter. This amount is indexed annually according to the indexation factor.

The Commissioner's views on OTE generally, including termination payments, are included in Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages'.

Payments in lieu of notice and OTE

Paragraph 38 of SGR 2009/2 outlines the ATO view on payments in lieu of notice with respect to an employee's OTE. This paragraph states:

38. An employee may be entitled to a period of notice before the employer's termination of his or her employment takes effect. Awards and agreements often provide that, instead of giving this notice, the employer may simply pay an amount equivalent to the ordinary time rate of salary or wages that the employee would have earned during the notice period. Such payments are OTE.

In your application, you advised the consideration period is two months. Further, you provided an example in your application for occasion when the employer offers employees, payment in lieu of consideration period, as follows:

Date of offer is 30 June 2010

If the employee elects 30 June 2010 they receive the full entitlement (1 July 2010 to 30 August 2010)

If the employee elects 30 July 2010 they receive a reduced payment (31 July 2010 to 30 August 2010)

In the situation you enquired about, in accordance with the Agreement, should the employees request an earlier termination date that falls within the discussion and consideration period, the employee will be entitled to receive payment for the unexpired portion of the discussion and consideration period.

Both the example and the situation describing payments in lieu of consideration period fall within the example set out in paragraph 38 of SGR 2009/2. Further they fall precisely within the definition of OTE provided by subsection 6(1) of the SGAA particularly paragraph 6(1)(a) which specifically includes these types of lumps as OTE.

However, the payment in lieu of the unexpired portion of the discussion and consideration period will include an amount equivalent to the Annual Leave and Long Service Leave entitlements that would have accrued to the employee had they worked through their discussion and consideration period.

The definition of OTE under subsection 6(1) of the SGAA specifically excludes lump sum payment of unused annual leave payments or unused long service leave payment on termination of the employee's employment.

Conclusion

According to SGR 2009/2, with reference to the evidence and facts that you have provided, the payment in lieu of consideration period that you may pay to employees is paid in relation to your employees' ordinary hours of work. Accordingly this termination payment satisfies the definition of OTE as set out in subsection 6(1) of the SGAA. This is because when the organisation pays their eligible employees payment in lieu of consideration period there is a nexus between this payment and the employees' work.

However, as the payment in lieu in question includes an amount equivalent to the Annual Leave and Long service Leave entitlements that would have accrued to the employee had they worked through their discussion and consideration period, the amount of the payment which relate to these leave entitlements are not treated as OTE as provided under the subsection 6(1) of the SGAA.