Edited version of administratively binding advice

Authorisation Number: 1012591157185

Advice

Subject: Superannuation guarantee

Question

Will the proposed discretionary employer payment to be made to employees in respect of a personal expense form part of the employees ordinary time earnings for the purposes of subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

Yes. Refer to Reasons for decision.

This advice applies for the following period:

1 July 2013 - 30 June 2014

Relevant facts and circumstances

The Employer engages workers under employment contracts, which may or may not be underpinned by an industrial award. The employment contracts provide that the employer may pay discretionary benefits to the employees in respect of certain personal expenses.

The Employer's authorised representative wrote to the Commissioner requesting administratively binding advice (ABA) concerning the Employer's superannuation guarantee (SG) obligations in relation to a one off annual payment made on the employees' behalf in respect of the discretionary employer payment.

The application provided the following information:

The Employer provides a discretionary benefit which is available to employees meeting certain criteria.

• The discretionary benefit is paid on an annual basis to the employees.

• Currently the amount paid to employees in relation to the discretionary benefit is considered to be a fringe benefit and as such, the Employer pays fringe benefits tax (FBT) in respect of the total cost reimbursed to employees.

• Due to the significant cost of the FBT under the current arrangement the Employer is proposing to put in place new arrangements to reduce the cost of providing the discretionary benefit to employees.

• Under the new arrangement, the Employer will continue to pay the discretionary benefit to employees. The Employer is proposing to make a one off annual payment to relevant employees which, after deducting pay-as-you-go ("PAYG") withholding, will then be paid to the employees.

• The new arrangements will result in a cost saving to the Employer as the net cost of the one off annual payment made to eligible employees will be lower than the FBT cost of providing the discretionary benefit.

• The Employer proposes to effect the new arrangements as follows:

- Following the Employer's final pay run for the financial year, the one off annual payment to employees in respect of discretionary benefit will be paid.

- The one off annual payment made to employees will be grossed up at employees marginal tax rates (plus medically levy) to allow for the required PAYG withholding to be made from the payments.

- After PAYG withholding is withheld from the one-off payment, the remainder would then be paid to the employee.

Your contentions

In your application it was contended that the one off annual payment is not earnings in respect of ordinary hours of work for employees and accordingly does not meet the definition of OTE. The basis for this contention is:

• The new arrangement does not result in the changing of the employees contracted gross remuneration, or the changing of any other aspect of the Employer's employee benefit program and the payment is not 'earnings' in respect of 'ordinary hours of work'.

• The actual hours of work performed and the nature of the services provided by employees does not alter under the new arrangements.

• The one-off payment has no link to the hours of work or to the services provided by employees.

• It was further contended that the one off annual payment could be regarded as an expense allowance. The basis for this contention is:

- Where an employee is paid the annual one off payment, there is a reasonable expectation that the payment will be fully expended in the course of providing services.

- In accordance with the principles outlined paragraph 72 and 266 of SGR 2009/2

- The annual one-off payment is an expense allowance not made for the employee services, but rather in recognition of the expenditure that the employee will incur.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 Subsection 6(1).

Reasons for decision

Summary

The proposed one-off annual payment to be made by the Employer to employees in respect of the discretionary benefits will form part of the employee's ordinary time earnings for the purposes of subsection 6(1) of the SGAA.

Detailed reasoning

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 percentage.

From 1 July 2008, employers must use OTE as defined in subsection 6(1) of the SGAA as the earnings base to calculate the minimum SG contributions for their employees. This ensures that all employees are treated the same for superannuation purposes.

Some 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.

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 termination of employment in lieu of unused sick leave, unused annual leave and unused long service leave; or

b) 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 2013/14 year of income is $48,040 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'.

Paragraph 12 of SGR 2009/2 provides the meaning of 'earnings' and states:

12. 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. The practical effect for superannuation guarantee purposes is that the expression 'earnings' means 'salary or wages'.

Paragraphs 13 to 15 of SGR 2009/2 addresses the meaning of 'ordinary hours' of work and state:

13. 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.

14. The document need not use the exact expression 'ordinary hours of work', but it needs to draw a genuine distinction, for the purposes of the award or agreement, between ordinary hours and other hours. In particular, it would be expected that the other hours are remunerated at a higher rate (typically described as overtime) than the ordinary hours, or otherwise identifiable as a separate component of the total pay in respect of non-ordinary hours

15. Any hours worked in excess of, or outside the span (if any) of, those specified ordinary hours of work are not part of the employee's 'ordinary hours of work'.

Paragraphs 25 and 26 of SGR 2009/2 provide that earnings in respect of ordinary hours of work means all earnings, other than overtime and state:

25. 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.

26. An award or agreement may itself have a definition of 'ordinary time earnings' that purports to apply for superannuation purposes. However, the central question posed by the definition of OTE in the SGAA is what amounts are 'earnings in respect of ordinary hours of work'. This could in some cases be a different amount from any purported amount of 'OTE' in the award or agreement. As mentioned in paragraph 13 of this Ruling, the Commissioner accepts that 'ordinary hours of work' are as determined by the relevant award or agreement, but that does not imply that OTE itself is necessarily as determined by the award or agreement.

Paragraph 27 of SGR 2009/2 addresses certain specific kind of additional payments that are ordinary time earnings for SG purposes. Paragraph 27 of SGR 2009/2 states:

27. Many employees receive various additional payments that are described as allowances or loadings and that are paid to employees to recognise or compensate for certain conditions relating to their employment. Examples:

• a 'site allowance' paid fortnightly at a flat rate in acknowledgement of the displacement an employee undergoes when a job requires him or her to work in a remote location;

• a 'casual loading' of 20% of the basic ordinary time rate of pay paid to a casual worker in lieu of any fixed, regular minimum hours of work and of paid leave entitlements;

• a 'dirt allowance' paid as a flat rate in acknowledgement of the conditions in which the work is undertaken; and

• a 'freezer allowance' paid at the rate of an extra $2.50 per hour to employees, such as some supermarket employees, who perform most of their duties in cold storage facilities.

• These kinds of payment are OTE except to the extent that they:

• are not 'salary or wages', for example if they are payments of a predetermined amount to offset or reimburse particular expenses (see paragraph 72 of this Ruling); or

• relate solely to hours of work other than ordinary hours of work (see paragraphs 41 to 43 of this Ruling).

Paragraphs 72 and 73 of SGR 2009/2 provide that expense allowances and reimbursements are not salary and wages for SG purposes. Paragraph 72 and 73 of SGR 2009/2 state:

72. Expense allowances, that is, those allowances paid to an employee with a reasonable expectation that the employee will fully expend the money in the course of providing services, are not 'salary or wages'.

73. A reimbursement that compensates an employee for an expense they have incurred on behalf of the employer is also not 'salary or wages'.

Expense allowances are further addressed at paragraphs 266 of SGR 2009/2 which states:

266. An expense allowance is an allowance which is paid with the reasonable expectation that the money will be fully expended by the employee in the course of providing their services. The expense allowance is not given for the services of the employee, but rather in recognition of the expenditure that the employee will incur in the course of providing their services. As this type of allowance does not fall within the ordinary meaning of 'salary or wages', it does not form part of 'salary or wages' for the purposes of section 11. It also does not form part of an employee's OTE.

Certain specific kinds of payments, including bonuses, form part of an employee's OTE for SG purposes. Bonuses are addressed at paragraphs 28 and 29 and paragraphs 274 to 278 of SGR 2009/2. Paragraphs 28 and 29 of SGR 2009/2 state:

28. 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.

29. 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.

Paragraphs 274 2007 8 of SGR 2009/2 state:

274. 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 would the Commissioner accept that the payment is made on a personal basis and so is not salary or wages, and therefore not OTE, for SGAA purposes.

275. 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.

276. Accordingly, it was held that the payments were OTE as well as 'salary or wages' for superannuation guarantee purposes. A bonus that is a 'retention payment' is not based on the performance of the individual, but rather there is a contractual right to the bonus if the relevant individual has been employed for the full year and remains employed at the payment date. The payment is primarily designed to ensure retention of staff.

277. These are no different from other kinds of bonus. They are a form of remuneration for services rendered and would be assessable as income in the hands of the employee. Therefore, a retention payment is 'salary or wages'.

278. A 'sign-on' bonus is salary or wages if it is assessable income in the hands of the employee for income tax purposes. Only in limited situations would the Commissioner accept that such a payment is not assessable income, as where the payment is clearly referable to a separate restrictive covenant entered into by the employee: see Income Tax Ruling IT 2307.

Application of the law

The Employer proposes to gross up the payment at the employee's marginal tax rates to allow for the required PAYG withholding and applicable Medicare levy to be deducted from the payment.

Based upon the information provided in the application and the fact that this payment will be made at the employee's marginal tax rates, this payment will be included in the employee's income for PAYG purposes.

Expense allowance

In the application it was contended that the payment may be considered to be an expense allowance.

As provided in paragraph 72 of SGR 2009/2, expense allowances paid to employees do not form part of the employees' salary or wages and therefore their OTE if the allowance is paid with the reasonable expectation that the employee will fully expend the money in the course of providing their services to the Employer.

The expense that is reimbursed under the discretionary benefits plan is a private expense, not an expense related to employment. The Commissioner considers that the payment in respect of the discretionary benefit is not made in recognition of expenditure that an employee will incur in the course of providing their services to the Employer. Furthermore, the Commissioner considers that there is no reasonable expectation that the payment would be fully expended in the course of the employee providing services to the Employer.

The Commissioner does not consider that the payment made in relation to the discretionary benefit is an expense allowance.

Ordinary time earnings

In the application it was contended that the payment in relation to the discretionary benefit is not earnings in respect of ordinary hours of work for employees and accordingly does not meet the definition of OTE.

Whilst under the proposed arrangement an employee's ordinary hours of work do not differ from the previous arrangement, relevantly to this situation, we must consider what are the employees 'earnings in respect of ordinary hours of work'.

It is the Commissioner's view, as expressed in paragraph 25 of SGR 2009/2, that all amounts of earnings in respect of employment are in respect of an employee's ordinary hours of work unless they are remuneration for working overtime hours, or otherwise referable to only overtime or other hours that are not ordinary hours of work.

It is the Commissioner's view that certain specific kinds of payments form part of an employee's OTE for SG purposes and this includes bonus payments.

Paragraph 28 of SGR 2009/2 relates to bonuses and clearly states that additional earnings received as a reward for good performance, and other like bonus payments do form part of an employee's OTE in most cases.

Bonuses are further addressed at paragraphs 274 to 278 of SGR 2009/2 and these paragraphs indicate that bonuses include amounts that are paid as retention payments and sign-on payments.

An amount that is paid to an employee that is not based on the performance of the individual, but rather there is a contractual rights to the bonus if an individual has been employed for a specified amount of time is regarded to be a bonus payment.

The information provided with the application indicates that there is a contractual right for an employee to receive discretionary benefits.

Conclusion

The Commissioner considers that the discretionary benefits that will be made to employees under the proposed amended arrangements is a bonus payment which does form part of the employees' ordinary time earnings for the purposes of subsection 6(1) of the SISA.