Edited version of your written advice

Authorisation Number: 1012745678997

Advice

Subject: Superannuation guarantee

Question

What are the ordinary hours of work of individuals employed under Employment Contracts and Individual Agreements which are underpinned by a Modern Award for the purpose of calculating ordinary time earnings (OTE) in respect to the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

The ordinary hours of work for the purpose of calculating the OTE of individuals employed under Employment Contracts and Individual Agreements which are underpinned by a Modern Award in respect of the SGAA are an average of 38 hours per week over a three week period, equating to 114 hours in total for that period.

This scheme commenced on:

After 1 July 2013

Relevant facts & 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 Employer engages workers under a Modern Award (the Award) via Employment Contracts (Contracts) and Individual Agreements (IA's).

The Award allows flexibility in that the Employer and an employee may agree to vary certain provisions of the award in respect of:

• Maximum amount of daily hours;

• Overtime rates;

• Penalty rates; and

• Allowances.

A clause of the Award provides that the employee's ordinary hours of work are an average of 38 hours per week up to a maximum of 10 hours per day to be worked between the hours of 6.00am and 6.00pm.

A clause of the Award allows for the maximum daily hours to be increased to 12 hours per day if a majority of affected employees are in agreement.

A clause of the Award allows for employees to be engaged on a work cycle made up of working and non-working days. When employees are engaged on a work cycle, the total ordinary hours of work must not exceed 38 hours multiplied by the number of days (working and non-working) in the work cycle divided by seven.

A clause of the Award allows for employees to be paid overtime in respect of all work done in addition to their ordinary hours.

The Employer engages employees on a work cycle that is 12 hour shifts, 14 days on and 7 days off.

The employees are paid a flat rate and do not receive overtime as the higher rate compensates for the loss of overtime.

The employees are engaged under a Contract which sets out the terms and conditions of their employment and IA's which set out the specific amendments to the Award conditions and the rate of remuneration.

The Contract provides the following information:

• The hours of work are on a roster basis relating to the standard operating hours of the work site and the employees agree to work the roster specified by the Employer.

• The ordinary hours of work each week are an average of 38 hours per week.

• Employees are required to work additional hours that are considered reasonable to perform their duties.

The IA provides the following information:

- The employees are paid at a flat rate in compensation for the following award provisions which have been varied:

• Maximum daily hours;

• Overtime rates;

• Penalty rates; and

• Allowances.

The amount of the payment in excess of the Award provisions constitutes an over-award payment.

Relevant legislative provisions

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

Reasons for decision

Summary

The ordinary hours of work for the purpose of calculating the OTE of individuals employed by under Employment Contracts and Individual Agreements which are underpinned by a Modern Award in respect of the SGAA are an average of 38 hours per week over a three week period, equating to 114 hours in total for that period.

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 SG 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' (SGR 2009/2)

Ordinary hours of work

The meaning of 'ordinary hours of work' is discussed in paragraphs 13 to18 of SGR 2009/2 and is further clarified in paragraphs 189 to 210 of SGR 2009/2.

Paragraphs 13 to 15 and 18 of SGR 2009/2 address 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'.

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

Paragraphs 20 to 23 of SGR 2009/2 set out the payments that are specifically included in the definition of 'ordinary time earnings' in subsection 6(1) of the SGAA. Relevantly, paragraphs 20 and 21 state:

20. Earnings consisting of over-award payments, shift-loading or commission are specifically included in the definition of OTE by subparagraph (a)(ii) of that definition in subsection 6(1).

Over-award payments

21. An over-award payment is the component of a payment in excess of an award entitlement. The Commissioner's view is that the specific inclusion of these payments does not apply to over-award payments that are specifically referable to hours worked that are not ordinary time hours. For example, an employer's policy may be to offer a higher rate of overtime pay for some overtime hours worked than the penalty rate required by an award. Even though technically over-award payments, such additional payments would not be OTE under subparagraph (a)(ii) of the definition of OTE in subsection 6(1).

Whilst awards or agreements may have a definition of 'ordinary time earnings' that purports to apply for superannuation purposes, the question posed by the definition of OTE in the SGAA is what amounts are earnings in respect of ordinary hours of work.

Paragraphs 25 and 26 of SGR 2009/2 specify that earnings 'in respect of ordinary hours of work' means all earnings other than overtime. Paragraphs 25 and 26 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.

Appendix 2 of SGR 2009/2 provides an explanation of the legislative context applied to assist taxpayers to understand how the Commissioner's view has been reached.

Paragraphs 225 to 228 specify that earnings 'in respect of ordinary hours of work' means all earnings other than overtime.

Relevantly, paragraphs 225 and 226 state:

225. 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.

226. The Commissioner does not consider that the services or attendance of an employee specifically during certain hours of work is necessary for the earnings to be 'in respect of ordinary hours' and therefore OTE. The Commissioner's view is that the expression 'in respect of ordinary hours of work' was intended to ensure that overtime payments, and cognate amounts, were excluded from the earnings base. It was not intended to exclude amounts paid at a worker's ordinary time rate solely on the ground that they were not earned as a direct result of actually working particular hours in ordinary time.

Application of the law to your circumstances

In this case workers are employed under Contracts and IA's which are underpinned by the Award.

A clause of the Award allows the employer and an employee to vary the application of certain terms of the Award, including arrangements for when work is performed, overtime rates, penalty rates, allowances and leave loading.

The Award specifies that an employee's ordinary hours of work for a full-time employee are an average of 38 hours per week.

The Contract further specifies that the ordinary hours of work shall be an average of 38 hours per week; however, employees will be required to work such additional hours as considered reasonable.

The employees' hours of work are set on a roster basis which is 12 hour shifts, 14 days on then 7 days off.

Therefore, in a three week cycle, employees are working 168 hours which equates to 56 hours per week, over the three week cycle.

As allowed under a clause of the Award, the IA varies the application of certain terms of the Award. In this case, the IA provided has varied the following conditions:

• arrangements for when work is performed;

• overtime rates;

• penalty rates; and

• allowances

Under the IA, employees are paid a flat rate to compensate them for the variation to when work is performed, the loss of overtime rates, the loss of penalty rates and the loss of allowances.

Paragraph 14 of SMSFR 2009/2 provides that the relevant award or agreement must draw a genuine distinction between ordinary hours and other hours. Furthermore, it is expected that these other hours, typically described as overtime, are remunerated at a higher rate of pay than the ordinary hours or are otherwise identifiable as a separate component of the total pay in respect of non-ordinary hours.

As provided in paragraph 25 of SGR 2009/2, 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, or are otherwise referrable to overtime or other hours that are not ordinary hours of work.

In applying paragraph 14 of SMSFR 2009/2 to this case, the Award specifies that a full time employee's ordinary hours of work will be an average of 38 hours per week. In this case, the workers are paid a flat rate for all hours worked. The flat rate incorporates overtime rates, penalty rates, allowances and compensates the employees for varying the standard working shift from 10 to 12 hours.

Whilst the Award does not specify the employees 'ordinary hours of work' paragraph 14 provides that the Award or Agreement does not need to use the exact expression 'ordinary hours of work'. Therefore, it is considered in this case that as the Award specifies the employees ordinary hours of work to be an average of 38 hours per week, these hours are the employee's 'ordinary hours of work'.