Edited version of private advice

Authorisation Number: 1012670680067

Advice

Subject: Superannuation guarantee and ordinary time earnings

Question 1

Does the allowances paid to employees form part of ordinary time earnings (OTE) under subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

Yes. Both payments form part of OTE under subsection 6(1) of the SGAA.

Please refer to 'Reasons for decision'.

This advice applies for the following period:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Relevant facts and circumstances

1. Allowance payments are made to employees.

2. The allowances are paid as compensation for certain conditions of employment.

3. The allowances are not expense reimbursements.

4. The allowances are paid unconditionally upon the employees meeting certain requirements.

Reasons for Decision

Summary

5. Both the allowances payable to the employees form part of OTE under subsection 6(1) of the SGAA.

6. The employer is required to pay superannuation guarantee on the allowances.

Detailed reasoning

7. The phrase 'ordinary time earnings' is defined in subsection 6(1) of the SGAA as follows:

ordinary time earnings, in relation to an employee, means:

(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 employment:

ii. 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 commission; or

…

(b) if the total ascertained in accordance with paragraph (a) would be greater than the maximum contribution base for the quarter - the maximum contribution base.

8. In broad terms (and subject to some exceptions), OTE of an employee means earnings in respect of ordinary hours of work. Payments for work performed outside the ordinary hours of work, such as overtime payments, are not OTE.

9. OTE is usually the amount an employee earns for their ordinary hours of work. It includes commissions, shift-loadings and some allowances, but does not include overtime payments. Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2) provides further guidance on what constitutes OTE.

10. Paragraph 13 of SGR 2009/2 addresses the meaning of 'ordinary hours' of work and states:

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.

11. Paragraph 25 of SGR 2009/2 provide that earnings in respect of ordinary hours of work means all earnings, other than overtime and that there is no such thing as earnings that are merely in respect of employment generally:

Allowances

12. SGR 2009/2 addresses allowances at paragraphs 27, 65 and 72.

13. Paragraph 27 relates to certain specific kinds of payments that are OTE and states:

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

• a site allowance….

• a casual loading….

• a dirt allowance….

• a freezer allowance….

These kinds of payments 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…"

14. Paragraph 45 of SGR 2009/2 explains that certain on-call allowances are considered OTE where they are paid whilst the employee is doing ordinary hours of work:

45. In some cases on-call allowances are paid as a loading on the salary of an employee received for ordinary hours of work. For example, some doctors employed by hospitals are paid an extra hourly allowance, while carrying out routine duties in ordinary hours of work, to make themselves available to perform urgent surgery if required. Payments of that kind are OTE (except of course to the extent that they are paid in respect of overtime hours).

15. Paragraphs 72 and 73 provide that all allowances are salary or wages except for those which are expense allowances. It states:

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'.

16. Paragraphs 259 to 263 relate to allowances and reimbursements. These paragraphs state:

259. Section 11 does not expressly include in its definition of 'salary or wages' the term 'allowance'. The Commissioner however interprets the expression as used in the SGAA context as extending to the same kinds of allowances that have been regarded as salary or wages under definitions of 'salary or wages' that expressly include allowances.

260 In Mutual Acceptance, the High Court considered whether a fixed weekly payment to employees who used their own motor vehicles in the course of their duties was an 'allowance' and therefore 'wages' as defined the then Commonwealth Pay-Roll Tas Assessment Act 1941-42. The payment represented partial compensation for the motor vehicle expenses to be incurred by those employees.

261. In discussing what may be considered as the ordinary meaning of an 'allowance' Latham CJ in Mutual Acceptance stated that an allowance paid as compensation for unusual conditions of services:

… represents higher wages paid on account of special conditions, and may be fairly described as part of wages in the ordinary sense (emphasis added)

262. Mutual Acceptance was relied upon in Road & Traffic Authority of NSW v. Federal Commissioner of Taxation where the employees received fare allowances under the relevant award for travel to and from work. They were paid regardless of whether or not the employee incurred the expenditure. The question for decision was whether the allowances were expense payment benefits subject to fringe benefits tax or were within the definition of 'salary or wages' in former subsection 221A(1) of the ITAA 1936.

263. Hill J considered the allowance as additional compensation to the employees for their services. There was no need that the remuneration relate to specific services rendered, as long as the payments in question were given as remuneration for services generally. The fare allowances had no relationship to the actual cost of travel incurred by the employees. Accordingly, they were not reimbursements. The fare allowances were held to be 'salary or wages'.

17. Therefore, where an allowance is paid to compensate the employee for costs and unusual conditions of service as one allowance, rather than distinguishing the components of the allowance, it is considered that the allowance forms part of an individual's salary or wages.

Application to the circumstances

18. In this case the employees are paid allowances.

19. The allowances are paid as compensation for certain conditions of employment.

20. The allowances are not expense reimbursements.

21. The allowances are paid unconditionally upon the employees meeting certain requirements.

22. It is considered that the allowance is similar to a loading paid to doctors who make themselves available, during their ordinary hours, to perform surgery; as the allowances are paid to employees whilst they are working ordinary hours to compensate them for certain conditions of employment.

23. As both allowances are paid to compensate the employee for costs and the unusual conditions it is considered that the allowances form part of the employee's salary or wages.

24. Therefore the allowances are OTE and the full amounts would be included in any superannuation guarantee calculation.