Edited version of administratively binding advice

Authorisation Number: 1012051018247

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Advice

Subject: Superannuation Guarantee

Question 1

Based on the facts provided, does the holding company, as the sole payer of salary and wages to non-executive directors (NED's) of the Group of companies, have the obligation to pay any superannuation guarantee charge (SGC) in accordance with section 16 of the Superannuation Guarantee (Administration) Act 1992 (SGAA) in respect of any superannuation guarantee shortfall amount determined under section 17 of the SGAA?

Answer: Yes, please see Reasons for decision below.

Question 2

Based on the facts provided, does a subsidiary of the holding company to whose board the NED is appointed but which makes no payment of salary or wages to the NED have any obligation to pay any SGC in accordance with section 16 of the SGAA in respect of any superannuation guarantee shortfall amount determined under section 17 of the SGAA?

Answer: No, please see Reasons for decision below.

Question 3

If the answer to Question 1 above is yes, is the superannuation guarantee shortfall amount calculated on the basis of a single maximum contribution base under section 15 of the SGAA for each NED irrespective of the number of board appointments?

Answer: Yes, please see Reasons for decision below.

This advice applies for the following period:

1 July 2007 to 30 June 2017

The arrangement commences on:

1 July 2007

Relevant facts and circumstances

Your 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.

The holding company engages NED's for their services as directors on the boards of various companies within the Group.

Each NED is engaged by the holding company (in some cases the letter of appointment is on the letterhead of the service company however, this entity is acting as an agent for the holding company) to provide directorship services to a number of Group companies in consideration of an annual single remuneration package.

The remuneration package of the NED's comprises:

(a) a base 'composite' fee. The quantum of this base fee varies dependant on which boards a NED is appointed to; and

(b) a 9% superannuation guarantee contribution, calculated up to the 'superannuation guarantee maximum contribution base' on the base fee and paid to the NED's chosen complying superannuation fund.

Additional fees are sometimes paid for service on committees.

On behalf of the holding company, the service company pays each NED's base fee and superannuation contributions. Since 2009 Payment Summaries provided to the NED's show the holding company's ultimate parent company as the payer. This is due to systems and administration simplification but it should be noted that the remuneration costs are incurred by the holding company.

For financial and management accounting purposes overhead expenses of the holding company, which may include the NED's fees, may be allocated to the relevant subsidiaries of the holding company.

The NED's enter into an agreement for the provision of their services with the holding company.

The holding company is the payer of all salary and wages.

The holding company pays all superannuation contributions for the NED's.

The holding company is the employer of the NED's at common law because the NED's terms of appointment have all the key hallmarks of a contract of service.

There is no standard template for the letter of appointment of a NED and the standard terms and conditions governing the appointment, whilst similar in content, have from time to time varied in format.

In some cases the letters of appointment have been issued by the holding company (i.e. signed by the Chairman of the holding company) whereas in other cases the appointment letters are signed by a representative of the Company Secretariat division of the Group. Irrespective of the signatory on the letter of appointment, the NED is engaged and paid by the holding company.

The NED's are not entitled to any payment from the subsidiary companies directly.

Relevant legislative provisions

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

Superannuation Guarantee (Administration) Act 1992 section 12

Superannuation Guarantee (Administration) Act 1992 section 15

Reasons for decision

Question 1

Summary

Yes, as the common law employer of the NED's, the holding company has a requirement to provide a minimum level of superannuation support for the NED's by the due date. If the minimum level of superannuation support for the NED's has not been paid by the due date the holding company is required to lodge a superannuation guarantee statement and pay the SGC to the ATO.

Detailed reasoning

Employment Relationship

The SGAA defines 'employee' in section 12. The definition is both a clarifying and extending provision. Subsection 12(1) defines the term 'employee' as having its ordinary meaning - that is, its meaning under common law. If a worker is held to be an employee at common law, then they will be an employee under the SGAA (unless one of the limited exceptions in subsections 12(9A) and (11) applies).

In your case, the NED's are common law employees of the holding company. As the common law employer of the NED's, the holding company has a requirement to provide a minimum level of superannuation support for the NED's by the due date.

Ordinary time earnings

The SGAA places a requirement on all employers to provide a minimum level of superannuation support for their eligible employees by the due date.

From 1 July 2008 all employers will calculate their superannuation guarantee liability against an employees ordinary time earnings (OTE)

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

(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 employer:

(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 commissioner; or

(a) 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 SGAA does not define the term 'earnings' or 'ordinary hours of work'. Accordingly, these terms take their ordinary meaning. In the context of the SGAA the word 'earnings' refers to the remuneration paid to an employee as a reward for the services of the employee.

An employee's 'ordinary hours of work' for the purposes of the definition of OTE are the hours of work during which it is usual for the employee to work. The word ordinary means regular, normal customary or usual. The expression 'ordinary hours of work' in relation to an employee is understood as meaning the hours the employee normally, usually regularly or customarily works in their employment.

If the ordinary hours of work are not specified or agreed, or if the offer of employment specifies only the minimum hours that an employee will be called upon to work, the 'ordinary hours of work' for superannuation guarantee purposes will be the hours actually worked.

In this case the NED's are not employed under an award or an agreement that specifies ordinary hours. The letter of appointment states that the duties of a NED will involve attendance at a number of board and/or committee meetings however the number of hours are not specified. Therefore the ordinary hours of work of a non-executive director are the hours actually worked.

Application to your circumstances

As the common law employer of the NED's, the holding company has a requirement to provide a minimum level of superannuation support for the NED's by the due date. If the holding company has not paid the minimum superannuation contributions to a complying superannuation fund or RSA for the NED's by the due date, the holding company is required to lodge a superannuation guarantee statement and pay the SGC to the ATO.

Question 2

Summary

No, as the non executive directors are engaged through a tripartite arrangement and there is no contractual relationship between the NED and the companies whose boards they sit they are not employees for the purposes of the SGAA either under the definition of an employee or under the extended definition of an employee.

Detailed reasoning

Employment Relationship

Superannuation Guarantee Ruling, Superannuation guarantee: who is an employee? (SGR 2005/1) explains when an individual is considered to be an 'employee' under section 12 of the SGAA. The expressions 'employee' and 'employer' in the SGAA have both their ordinary meaning and an extended meaning. It also discusses the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term. In addition, it clarifies which persons are employees under the extended definition and also considers the circumstances in which an individual who may otherwise be an employee is specifically exempted from the scope of the SGAA.

Under subsection 12(1) of the SGAA, if a person is an employee at common law, that person is an employee under the SGAA.

The classification of a person as an employee for the purposes of the SGAA is not solely dependent upon the existence of a common law employment relationship. While the definition includes persons who at common law would be regarded as employees, it also extends to include:

§ a person who is entitled to payment for the performance of duties as a member of the executive body of a body corporate (subsection 12(2));

Contract necessary for employment

Superannuation Guarantee Ruling: work arranged by intermediaries (SGR 2005/2) explains the Commissioners view of how the definitions of "employer" and "employee" in the SGAA apply to contractual and working arrangements involving three or more parties. These tripartite employment arrangements may involve various relationships (whether contractual or otherwise) between the entity requiring the services or work of an individual (end-user), an intermediary firm, and the individual performing the work or services.

Whatever the circumstances of a particular tripartite working arrangement, it is first necessary to determine whether a contract for the performance of work exists and with whom it exists. Only after this is established can the precise nature of the relationship (whether employee or otherwise) be determined.

If there is no contract between the worker and end-user in a tripartite working arrangement, the worker cannot be an employee of the end-user. Similarly, if there is no contract between the worker and the intermediary, the worker cannot be an employee of the intermediary.

In tripartite working arrangements, it is the ultimate or legal control over the worker that is most relevant; not the day-to-day direction and control. A contract between the intermediary and worker can still be a common law contract of employment even though the work is done for the immediate benefit of the end-user.

The relationship between an employer and an employee is contractual. An employment relationship cannot exist in the absence of a contract. The indicators listed by the courts in determining whether a contract is one of employment can only be applied once it is determined that a contract exists. They cannot be applied to determine whether a contract exists in the first place. The issue of whether a contract exists is a separate and distinct matter from the categorisation of a contract as one of employment or otherwise.

Therefore, to establish whether a worker is an employee of the intermediary firm or end-user under the SGAA, it is first necessary to determine whether:

§ a contract (whether written, oral or implied) exists between the worker and the intermediary;

§ a contract (whether written, oral or implied) exists between the worker and end-user; and

§ a contract exists between the intermediary and end-user.

Determining whether a contract exists is a matter of applying the ordinary principles of contract law. An agreement between parties will not be given effect by the courts as a legally enforceable contract unless a number of elements are present. In particular:

§ the parties must intend to be legally bound by their agreement;

§ there must be an offer by one party and its acceptance by the other; and

§ the promises which constitute the agreement must be supported by consideration (unless the agreement is in the form of a deed).

If, after applying the principles of contract law, it is found that there is no contract between the worker and the end-user in a tripartite working arrangement, the worker cannot be an employee of the end-user for the purposes of the SGAA. Similarly, if there is no contract between the worker and intermediary, the worker cannot be an employee of the intermediary under the SGAA.

The courts and various State Industrial Relations Commissions which have considered the nature of tripartite working arrangements in an industrial relations, workers compensation and pay-roll tax context have confirmed in a number of cases the principle that an employment relationship cannot exist unless a contract exists between the worker and either the end-user or intermediary. These cases also illustrate the importance of applying the principles of contract law to determine whether a contract exists.

Application to your circumstances

In this case, the NED's are engaged by the holding company to provide their services to various boards and/or committees in the group. Because each NED is entitled to the payment for the performance of duties as a member of the executive body of a body corporate, under subsection 12(2) of the SGAA the NED would be an employee of the body corporate. However, the requirement to provide payment for the performance of these duties is with the holding company and not the body corporate on whose board they sit. Remuneration and/or fees are not received by the NED directly from the company whose board they sit on and there is no entitlement to remuneration and/or fees from the company on whose board the NED is required to sit. All fees are paid under a remuneration agreement with the holding company and the NED is only entitled to payment from the holding company. The holding company is the employer at common law.

The letter of appointment contains the key hallmarks of a contract being offer, consideration and acceptance and the intention by both parties to be legally bound by the agreement. The letter of appointment outlines a contractual relationship of employer and employee between the holding company and the NED. Whilst the board/s and committee/s that the NED is engaged to sit on are listed in the letter of appointment there is no contractual obligation between the NED and the board/s and/or committee/s they are engaged to sit on.

In SGR 2005/1 at paragraph 13 the Commissioner has ruled that where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of the SGAA, either at common law or under the extended definition of employee. This is because the company or trust (not the individual) has entered into an agreement rather than the individual. However, the individual may be an employee of the intermediary company or trust, depending on the terms of the arrangement.

In your case, the NED performs work for the board/s and/or committee/s through the holding company. Therefore, there is no employer-employee relationship between the individual and the company on whose board they sit for the purposes of the SGAA, either at common law or under the extended definition of an employee. This is because the holding company has entered into an agreement to provide the directorship services to the subsidiary company rather than the individual NED. Under the terms of the arrangement the NED is an employee of the holding company.

As the NED is not the employee of the companies on whose boards they may sit, either at common law or under the extended definition of an employee in section 12 of the SGAA, the company on whose board they sit on does not have to pay any superannuation guarantee charge in relation to any superannuation guarantee shortfall under the SGAA.

Question 3

As there is only one employer for the purposes of the SGAA, being the holding company, the superannuation guarantee shortfall amount is to be calculated with only one maximum contribution base under section 15 of the SGAA irrespective of the number of board appointments.