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Subject: Employee bonus

Advice

The employee bonus paid to an employee, does form part of ordinary time earnings (OTE) as defined under subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA).

Facts

The employer operates a business.

The employer agrees to pay its employees a bonus based on the retention of a referred employee. The bonus is based on the retention and performance of the referred employee not on the performance of the employee who refers the new employee.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 6(1)

Reasons for decision

Summary

The employee bonus paid to an employee, does form part of ordinary time earnings (OTE) as defined under subsection 6(1) of the SGAA.

Detailed reasoning

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.

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 2011-12 year of income is $43,820 per quarter. This amount is indexed annually according to the indexation factor.

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

SGR 2009/2 states at paragraph 25 that earnings 'in respect of ordinary hours of work' means all earnings other than overtime.

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 otherwise referable only to overtime or to other hours that are not ordinary hours of work. There is no such thing as earnings that are merely in respect of employment generally and are not OTE because they are not in respect of any particular hours of work.

Bonuses

Paragraph 66 of SGR 2009/2 relates to certain payments that are 'salary or wages'.

Paragraph 66 states:

A bonus is 'salary or wages' if it is paid to an employee by reason of their services as an employee and not on a personal basis. Only in those very limited cases in which the Commissioner would accept that the payment is not assessable income of the employee for income tax purposes, in respect of their employment, would the Commissioner accept that the payment is made on a personal basis and so is not salary or wages for SGAA purposes…

Paragraphs 28 and 29 relate to certain specific kinds of payments that are OTE. Paragraph 28 states:

Additional earnings received as a reward for good performance, and other like "bonus" payments, are OTE in most cases. Exceptionally, a discrete and clearly identifiable bonus payment may relate solely to work performed entirely outside ordinary hours. For example, an employer may pay a bonus specifically to recognise a special project that an employee contributed to entirely in non-ordinary hours.

Paragraph 29 states:

There would need to be clear evidence that this was the sole basis for the payment. The more common case of a lump sum performance bonus that is at least partly referable to results achieved in ordinary hours of work is wholly OTE.

Example 21 of SGR 2009/2 is in relation to a performance bonus:

Tamara is an adviser at a finance company. At the end of the year, Tamara receives a bonus of $5,000, which the employer says is for her exceptional work and results during the year, and also for the long hours which she has had to work.

The payment made to Tamara is a reward for her services as an employee and is therefore salary or wages.

The bonus received by Tamara is a reward for the services she has provided to her employer. Therefore, the bonus is "earnings" for the purposes of the definition of OTE.

The earnings are "earnings in respect of ordinary hours of work". Although the bonus is said to recognise both her ordinary service and the long hours she has had to work, it is sufficiently connected with ordinary hours to be OTE. The Commissioner does not accept that such bonus payments can be dissected into an OTE component and "overtime" payments.

Example 22 of SGR 2009/2 is in relation to a bonus described as ex-gratia but paid in respect of ordinary hours of work:

Nancy is an employee of Tangerine Ltd. As an employee, Nancy was entitled to receive a bonus payment which was labelled an "ex gratia payment" by the employer. This bonus was paid out of a pool of funds from revenue generated by the work completed by the employees. In order to qualify for payment of the bonus, Nancy was required to achieve a minimum monthly revenue target. However, the employer was also able to exercise discretion to withhold the bonus on disciplinary grounds or pay a bonus to employees who did not meet the minimum monthly target. Payments were made in recognition of the hard work of the staff.

The payment made to Nancy is a reward for her services as an employee. Although the bonus payment is labelled an ex gratia payment, and is indeed gratuitous in as much as the employer does not necessarily have to pay it, this does not stop it from being salary or wages. There is a causal connection between the payment and the work completed by employees. The payment is not a personal gift unrelated to any work performed. The payment is therefore "salary or wages".

The bonus is not solely referable to hours of work outside ordinary hours. Therefore, the bonus payment is "in respect of ordinary hours of work" and is therefore OTE.

Example 23 of SGR 2009/2 is in relation to a Christmas bonus:

Suzie is an employee of JJ Pty Ltd. At the end of the year, the company gives her what is described as a Christmas gift of $250 in cash. It is said to be a Christmas bonus paid to Suzie as an expression of the company's goodwill. It is said to be not related to Suzie's performance at work.

On these facts, the Commissioner would treat the payment made to Suzie as salary or wages. In the absence of clear evidence to the contrary, the payment would be seen as in substance given as a reward for services provided in respect of her work despite the label which has been given to the payment. Only in rare cases, as where the payment is very small, or there is a family or other clear private connection between employer and employee, would the Commissioner entertain any suggestion that payments like this are not salary or wages. For income tax purposes, the payment would be regarded as salary assessable in Suzie's hands. In the same way, it is regarded as salary or wages for SGA Act purposes.

The bonus is not solely referable to hours of work outside ordinary hours. Therefore, the bonus payment is "in respect of ordinary hours of work" and is OTE.

SGR 2009/2 further addresses bonuses in paragraphs 275 to 277 inclusive.

Paragraph 274 explains that a bonus is salary and wages if the bonus is paid to an employee not on a personal basis but because of their services as an employee.

Paragraph 275 makes reference to Prushka Fast Debt Recovery Pty Ltd v. Commissioner of Taxation [2008] AATA 762 and states:

In Prushka , which involved payments to employees from a profit sharing bonus scheme based on specified revenue targets achieved, Tribunal Member Fice made the following fact findings: ... the bonuses paid by Prushka were clearly paid in an employment context and by reference to the specific performance of its employees as a group.

Conclusion

As the employee bonus payable does form part of OTE under subsection 6(1) of the SGAA the employer is required to pay SG on the allowance.