Edited version of administratively binding advice

Authorisation Number: 1012038079893

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Advice

Subject: Bonuses and ordinary time earnings

Question 1

Is the notional earnings base calculated under section 13 of the Superannuation Guarantee (Administration) Act 1992 (SGAA) the correct earnings base for the employees that were employed between the period of 1 July to 30 June of the relevant income years where contributions commenced being made by the organisation on or before 21 August 1991?

Advice

Yes. The notional earnings base calculated under section 13 of the SGAA is the correct earnings base for the employees that were employed between the period of 1 July to 30 June of the relevant income years, where contributions commenced being made by the organisation on or before 21 August 1991. Please see 'Reasons for decision'.

Question 2

Is the notional earnings base calculated under section 14 of the SGAA the correct earnings base for the employees that were employed between the period of 1 July 19 to 30 June of the relevant income years, where contributions commenced being made by the organisation after 21 August 1991?

Advice

Yes. The notional earnings base calculated under section 14 of the SGAA is the correct earnings base for the employees that were employed between the period of 1 July 19 to 30 June of the relevant income years ,where contributions commenced being made by the organisation after 21 August 1991. Please see 'Reasons for decision'.

Question 3

Is ordinary time earnings (OTE) the correct earnings base for the employees that were employed between the period of 1 July to 30 June in the relevant income years, where contributions commenced being made by the organisation after 21 August 1991, where their OTE is greater than the notional earnings base as defined in subsection 14(2) of the SGAA.?

Advice/Answers

Yes. OTE is the correct earnings base for the for the employees that were employed between the period of 1 July to 30 June for the relevant income years where contributions commenced being made by the organisation on after 21 August 1991, where their OTE is greater than the notional earnings base as defined in subsection 14(2) of the SGAA. Please see 'Reasons for decision'

Question 4

Do bonus payments made to the employees under the terms of the Agreements relating to the periods from 1 July to 30 June of the relevant income years meet the definition of OTE in subsection 6(1) of the SGAA?

Advice/Answers

Yes. The staff bonus payments do meet the definition of 'ordinary time earnings' (OTE) in subsection 6(1) of the SGAA. Please see 'Reasons for decision'.

Question 5

If the staff bonus payments meet the definition of OTE, is the organisation liable to make superannuation contributions for all bonus payments made between 1 July and 30 June of the relevant income years.

Advice

Yes. As the bonuses form part of OTE for the employees, the organisation has to ensure that the minimum superannuation contributions were made in respect to all OTE between 1 July and 30 June of the relevant income years where OTE is used as the earnings base. Please see 'Reasons for decision'

This advice applies for the following periods:

Relevant income years

The arrangement commenced on:

1 July XXXX

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 ATO advice.

Your advice is based on the following facts.

§ The organisation operates under an Agreement

§ The employment conditions are established under a law of a State of Australia.

§ The Agreement contains clauses for the payment of a bonus to staff in certain circumstances determined by the organisation's financial performance. It also details how the bonus is calculated and whom it is to be paid.

§ Clauses in the Agreement state provide for the various rules in relation to the payment of the bonus.:

§ These bonuses have been paid to the organisation's employees since the relevant financial year under various Agreements. However, they have not been included when calculating the employees' ordinary time earnings for the purpose of superannuation guarantee (SG).

Taxpayer contentions

§ At the time the bonus payments were made, they were not included in the ordinary time earnings calculation for the purposes of making superannuation contribution because an entity, which provides payroll services for the organisation, formed the view that it did not consider that the organisation's bonus payment should be included in the ordinary time earnings calculation as the payment of the bonus is based on the performance of the organisation as a whole, rather than on individual performance.

§ However, this interpretation came into question when the ATO issued Superannuation Guarantee Ruling - SGR 2009/2, Superannuation Guarantee: meaning of terms 'ordinary time earnings' and 'salary and wages

Relevant legislative provisions

Superannuation Guarantee Charge Act 1992 section 5

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

Superannuation Guarantee (Administration) Act 1992 section 13

Superannuation Guarantee (Administration) Act 1992 section 14

Superannuation Guarantee (Administration) Act 1992 section 17

Superannuation Guarantee (Administration) Act 1992 section 23

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 (SGC). The minimum level of support is calculated by multiplying the charge percentage (currently 9%) by each employee's earnings base.

Prior to 1 July 2008, an employer may have used the notional earnings base as defined in section 14 of the SGAA as the earnings base to calculate the minimum superannuation contributions for their employees

From 1 July 2008, an employer must use ordinary time earnings (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.

Notional earnings base

The concept of notional earnings base is defined in the SGAA. In broad terms it means the earnings of the employee by reference to which the requisite employer contribution is to be calculated. An employee's notional earnings base may be contained in an industrial award or agreement, a funds trust deed, an agreement with an employer or a law of the Commonwealth, of a State or of a Territory. If none of these are applicable then the default earnings base of OTE as defined in subsection 6(1) of the SGAA will apply.

Section 14 of the SGAA relates to notional earnings base where superannuation contributions are not made for the benefit of certain employees immediately before 21 August 1991.

Subsection 14(1) of the SGAA applies where contributions were not made for the benefit of an employee before 21 August 1991. Subsection 14(1) of the SGAA deals with the meaning of the expression 'notional earnings base' in relation to an employee, who is a member of a superannuation fund, to which an employer is contributing to the fund in the following situations:

§ Where the employer is contributing to a fund in accordance with an industrial award or an occupational superannuation arrangement

§ Where the employer is contributing to the fund in accordance with a law of the Commonwealth, a State or Territory

§ Where the employer is otherwise contributing to the fund under the appropriate superannuation scheme.

Subsection 14(1A) of the SGAA relates to the application of the notional earnings base where its meaning is dealt with in section 13, 13A or 13B.

Subsection 14(1A) of the SGAA states:

This section does not apply if the meaning of the expression "notional earnings base" in relation to the employee is dealt with in section 13, 13A or 13B

In relation to employees whose superannuation contributions commenced being made after 21 August 1991, their notional earnings base is defined in subsection 14(2) of the SGAA. Subsection 14(2) of the SGAA states:

Subject to sections (2A), (2B), (3) and (4), the expression "notional earnings base" means the earnings of the employee that, under the award, arrangement, law or scheme as in force on:

(a) the first day of a quarter; or

(b) the first day of employment: or

(c) the day on which the employer begins to contribute to the fund…;

whichever is the later, constitute the employee's earnings by reference to which the requisite employer contribution is to be calculated.

As the relevant law was in operation before 21 August 1991, it is relevant to the organisation's situation to consider subsection 14(2A) of the SGAA.

Subsection 14(2A) of the SGAA relates to employees for who contributions were made before 21 August 1991 if the employer is contributing in accordance with an industrial award, or a law of a State.

Subsection 14(2A) of the SGAA states: If:

(a) the employer is contributing for the benefit of the employee to the fund in accordance with an industrial award, or a law of a kind referred to in paragraph (1)(ab), that was operative immediately before 21 August 1991; and

(b) section 13 would operate to determine a notional earnings base in relation to the employee if the employer had been so contributing immediately before 21 August 1991;

the notional earnings base in relation to the employees is the notional earnings base referred to in paragraph (b).

As the organisation was contributing for the benefit of employees to the fund under a law of a State of Australia, it is relevant to your situation to consider section 13 of the SGAA.

Under subsection 13(1) of the SGAA, a pre-21 August 1991 earnings base can continue to be used where the following conditions are satisfied:

(a) the current employee is a member of a superannuation fund (the current fund) and

(b) the current employee's employer (the current employer) is contributing to the current fund, in accordance with an applicable authority (applicable authority is defined in subsection 13(5) of the SGAA and includes a law of a State) for the benefit of the current employee in relation to a contribution period; and

(c) subsection (1A) applies.

Subsection 13(1A) of the SGAA applies at the current time if the current employer, or an employer who is, at the current time, a predecessor employer of the current employer, was, immediately before 21 August 1991, contributing to:

(a) the current fund; or

(b) another fund that, at the current time, is a predecessor fund in relation to the current employer or the predecessor employer, as the case may be;

in accordance with the applicable authority, for the benefit of the current employee or another employee.

Under subsection 13(4A) of the SGAA, an employer (the test employer) is a predecessor employer of another employer (primary employer) in relation to another employer at a particular time (the test time) if subsection 4B or 4C applies at that time.

Subsection 13(4B) of the SGAA applies at the test time if, after 3.55pm, by legal time in the Australian Capital Territory, on 28 June 1994 and before the test time. Subsections 13(4B)(a) and (b) state:

(a) the test employer transferred to the primary employer, for market value consideration, the whole of the business or other undertaking, or an asset of the business or other undertaking, in which the employee was employed by the test employer immediately before the transfer; and

(b) immediately after the transfer, the employee was employed by the primary employer solely or principally in the transferred business or other undertaking, or in utilising the asset in the business or other undertaking of the primary employer.

Subsection 13(4C) of the SGAA applies to determine if the test employer is a predecessor employer of the primary employer. Subsection 13(4C) of the SGAA states:

This subsection applies at the test time if, because of subsection (4B), the test employer is at that time, in relation to the employee, a predecessor employer of another employer who, because of an application of subsection (4B) or this subsection, is at that time, in relation to the employee, a predecessor employer of the primary employer.

In relation to employees whose notional earnings base is calculated under section 14 of the SGAA, subsection 14(3) is relevant to their situation.

Subsection 14(3) of the SGAA relates to adjustments where notional earnings base is less than ordinary time earnings.

Subsection 14(3) of the SGAA states:

If, in a case where the employer is contribution to the fund or the RSA in accordance with…. A law of a kind referred to in paragraph (1)(ab) (a law of a State) or the applicable superannuation scheme, the employee's notional earnings base calculated in accordance with subsection 2 would, in relation to a quarter, be less than the employee's ordinary time earnings for the quarter, the employee's notional earnings base is the employee's ordinary time earnings.

Therefore, if the employee's notional earnings base was less than ordinary time earnings, ordinary time earnings would be the earnings base that would apply.

Definition of ordinary time earnings

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

(a)     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 the termination of employment in lieu of unused sick leave and unused annual leave.

(b)     the maximum contribution base for the quarter, which is the maximum limit on the amount of superannuation support that an employer is expected to provide for the benefit of the employee. The maximum contribution base for the income year ended 30 June 2010 is $40,170 per quarter.

The Commissioner's views on OTE for the period 1 July 1 to 30 June of the relevant income years as defined in the SGAA, were contained in Superannuation Guarantee Rulings SGR 94/4 Superannuation guarantee: Ordinary time earnings and SGR 94/5 Superannuation guarantee: Salary or wages which were applicable prior to 30 June 2009.

Generally, OTE are what employees earn for their ordinary hours of work, including over award payments, shift loadings, commissions and allowances (excluding expense allowances).

Therefore, in the present case, it is necessary to determine whether the bonus payments made to the Organisation's employees were earnings in respect of ordinary hours of work.

Earnings in respect of ordinary hours of work

For a payment to constitute earnings in respect of ordinary hours of work the payment must be considered earnings of the employee and the earnings must be in respect of the employee's ordinary hours of work.

An employee's earnings for the purposes of the definition of OTE in the SGAA is the remuneration paid to the employee as a reward for the employee's services.

Paragraph 11 of SGR 94/4 explains what is meant by the phrase 'in respect of ordinary hours of work'. All amounts of earnings in respect of employment are in respect of the employee's ordinary hours of work unless they are remuneration for working overtime hours or are referrable to overtime hours or to other hours that are not ordinary hours of work.

Ordinary hours of work

The meaning of 'ordinary hours of work' is discussed in paragraph 7 to 10 of SGR 94/4. These are summarised below:

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.

The document does not need to use the exact expression 'ordinary hours of work', but it needs to make a genuine distinction, for the purposes of the award or agreement, between ordinary hours and other hours. Where 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.

In cases, where it is not possible or practicable to determine the normal, regular, usual or customary hours of an employee's work it is the actual hours worked that are taken to be the ordinary hours of work.

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

Issue 1

Question 1

Summary

The notional earnings base calculated under section 13 of the SGAA is the correct earnings base for the employees who were employed between the period 1 July and 30 June of the relevant income years that commenced employment with the organisation on or before 21 August 1991.

Detailed reasoning

To determine if the pre-21 August 1991 earnings base can continue to apply we need to apply the circumstances relating to the organisation to the context of the law.

Subsection 13(1A) of the SGAA applies if the organisation or a predecessor employer was immediately before 21 August 1991 was contributing to the current fund or another fund, that at the time, was a predecessor fund, in accordance with the applicable authority for the benefit of the employee(s).

The organisation was established as a business unit of the entity some years ago. Prior to this the services provided by the organisation were undertaken by certain elements of the entity.

For subsection 13(1A) of the SGAA to apply, we need to determine if the entity was a predecessor employer under section 13(4A) of the SGAA.

Under subsection 13(4A) of the SGAA the entity will be a predecessor employer of the organisation if subsections 13(4B) or 13(4C) of the SGAA apply.

Subsection 13(4B) of the SGAA applies if, at 2.55pm, by legal time in the Australian Capital Territory, on 28 June 1994 and before test time:

(a) the entity transferred to the organisation, for market value considerations, the whole of the business or other undertaking, or an asset of the business or other undertaking in which the employee was employed by the entity immediately before the transfer; and

(b) immediately after the transfer, the employee was employed by the organisation solely or principally in the transferred business or other undertaking, or in utilising the asset in the business or other undertaking of the primary employer.

The Entity established the organisation as a business unit of the Entity. Therefore, it is considered that the test under subsection 4B(a) of the SGAA is satisfied.

Furthermore, some employees have been engaged with the organisation for considerable years. As the employees were previously employed by the Entity and their employment was subsequently transferred to the organisation, subsection 13(4B)(b) of the SGAA is satisfied.

Therefore as subsection 13(4B) of the SGAA applies, under subsection 13(4A) of the SGAA, the entity is a predecessor employer,.

Applying subsection 13(1) of the SGAA:

(a) the employees are members of a superannuation fund

(b) the organisation is contributing to the fund in accordance with an applicable authority which is a law of a state of Australia.

(c) subsection 13(1A) of the SGAA applies.

For those employees for whom the Entity commenced making contributions before 21 August 1991, subsection 13(1) of the SGAA applies and the notional earnings base as described in the relevant law is the correct earnings base for these employees.

Question 2

Summary

The notional earnings base calculated under section 14 of the SGAA is the correct earnings base for the employees of the organisation that were employed between the period of 1 July to 30 June of the relevant income years, where contributions commenced being made by the Organisation after 21 August 1991.

Detailed reasoning

Prior to 1 July 2008, employers may have been required to use the notional earnings base as defined in section 14 of the SGAA as the earnings base to calculate the minimum superannuation contributions for their employees.

Section 14 of the SGAA relates to superannuation contributions that were not made for certain employees immediately before 21 August 1991. Subsection 14(1A) of the SGAA deals with the meaning of the expression of "notional earnings base" in relation to an employee of a superannuation fund to which an employer is contributing to the fund under certain situations, one being in accordance with a law of a State. This is subject to subsection 14(1A) of the SGAA which does not apply to employees for whom contributions were made before 21 August 1991. (Refer to question 1)

The organisation made contributions under a law of a State. Therefore, section 14 of the SGAA applies for those employees for whom the Organisation commenced making contributions for after 21 August 1991.

Under subsection 14(2) of the SGAA, the "notional earnings base" means the earnings of the employee that, under the law in force on:

(a) the first day of a contribution period (year or quarter); or

(b) the first day of employment; or

(c) the first day on which the employer began to contribute to the fund;

whichever is the later, constitute the employees earnings by reference to the requisite employer contribution is to be calculated.

Conclusion

For those employees who commenced employment with the Organisation after 21 August 1999, the notional earnings base as calculated under section 14 of the SGAA is the correct earnings base.

Question 3

Summary

OTE is the correct earnings base for the for the employees of the organisation commenced being made by the Organisation on after 21 August 1991, where their OTE is greater than the notional earnings base as defined in subsection 14(2) of the SGAA.

Detailed Reasoning

Under subsection 14(3) of the SGAA, where the employer contribution is made to the fund in accordance with the law of the Commonwealth, a State or a Territory, if the employee's notional earnings base, calculated under subsection 14(2) of the SGAA for the period, would be less than the employee's OTE for the period, the employee's notional earnings base is the employees OTE.

Contributions were made to the fund in accordance with a law of a State.

If the employee's notional earnings base would be less than the employees OTE, then OTE is the earnings base that would apply under subsection 14(3) of the SGAA.

Conclusion

For employees for whom the Organisation commenced making contributions for after 21 August 1999, if their notional earnings base calculated by the superannuation board is less than OTE, then OTE is the earnings base that would apply.

Question 4

Summary

As the staff bonus payments relate to the financial performance of the organisation, they do meet the definition of OTE in subsection 6(1) of the SGAA.

Detailed reasoning

Paragraph 24 of SGR 94/4 provides that bonuses will form part of an employee's OTE where it is paid in respect of ordinary hours of work.

Paragraph 24 of SGR 94/4 explains:

A bonus will form part of an employee's ordinary time earnings where the bonus is paid in respect of ordinary hours of work. The CCH Macquarie Dictionary of Employment and Industrial Relations defines a bonus as:

'a payment above the regular basic rate or standard pay, e.g. a payment for overtime or shift work, or attendance, an allowance for work under exceptional conditions, as well as an incentive payment made under a piecework system or incentive scheme or as a production bonus.'

However, paragraph 25 of SGR 94/4 indicates that bonuses paid in relation to overtime would not form part of an employee's OTE.

In this case, the Agreement states that the bonus payment relates to the organisation's financial performance in the relevant financial year.

A clause of the Agreement details further conditions regarding the payment of bonuses.

From the facts provided we can see that the payment of a bonus is based on achieving a corporate outcome. It is clear that the payment of a bonus is not made on a personal basis. There is also no clear indication that the bonuses were solely based on work performed outside of ordinary hours of work.

The definition of 'salary' as provided in the State legislation indicates that an employees' salary for superannuation purposes is their annual figure, excluding fees and allowances. This provides that bonuses would form part of the employees' salary for superannuation purposes as the bonus is not a fee or allowance paid to the employee.

Conclusion

Based on the information contained in the Agreement and the State legislation, it must be concluded that the bonus payments paid by the organisation does meet the definition of OTE provided in subsection 6(1) of the SGAA.

Question 5

Summary

The information provided indicates that the organisation has not made any contributions on behalf of its employees in relation to the bonus payments made during the period between 1 July and 30 June of the relevant income years.

Therefore, the organisation is liable to make a superannuation contribution for all bonus payments made to eligible employees between 1 July and 30 June of the relevant income years.

Detailed reasoning

The organisation has asked us whether it is liable to make superannuation contributions for all bonus payments made during 1 July to 30 June of the relevant income years..

The organisation informed us that it had always used OTE to calculate it's liabilities in relation to the employees' SG, even prior to 1 July 2008 and advice was issued in a subsequent year that the bonus payments did form part of the employees' OTE.

Based on information subsequent to the issuing of the above advice in the subsequent year, the information that the organisation had always used OTE to calculate it's liabilities in relation to the employees' SG was incorrect and for the period 1 July to 30 June of the relevant income years they had used the definition of 'salary' as contained in the relevant law.

In accordance with section 23 of the SGAA, an employer's charge percentage (currently 9%) is reduced by the level of contributions paid on behalf of an employee on the relevant earnings base. The relevant earnings base for the organisation for the period 1 July to 30 June of the relevant income years is the salary as defined in the relevant law which as determined in question 1 includes the bonus payments.

After looking at all of the Agreements, the clauses relating to the bonus payments seem to have remained relatively unchanged with all the clauses being similar to the wordings used in the Agreement of the particular year. This means that the payment of bonuses, from 1 July to 30 June of the relevant income years, were always dependent upon the organisation achieving a corporate outcome and not strictly referrable to any overtime work.

The case of Prushka Fast Debt Recovery Pty Ltd v. Commissioner of Taxation was made by the AAT in 2008.This case looked at the definition of ordinary time earnings and underlying objective of the SGAA for a period when SGR 94/4 formed the Commissioner's view of OTE. This means that the same case law principle we have applied in Question 1 will apply to all bonus payments and should be included as part of the employees' OTE for the purpose of calculating the SG liability.

Conclusion

As determined by the facts, the organisation has not made any contributions on behalf of its employees in relation to the bonus payments made during the period between 1 July and 30 June of the relevant income years.

Therefore, the organisation's charge percentage is not reduced in accordance with section 23 of the SGAA and it is now liable to make a superannuation contribution for all bonus payments made to eligible employees between 1 July and 30 June of the relevant income years where OTE is used as the earnings base.