Edited version of your written advice

Authorisation Number: 1012884491027

Date of advice: 30 September 2015

Advice

Subject: Superannuation guarantee obligations - ordinary time earnings

Question 1

Are the shares issued under an employee share scheme to be included in ordinary time earnings (OTE) as defined under subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA), for the purpose of satisfying the minimum level of superannuation support required under the SGAA?

Advice

No. Refer to 'why we have made this decision'

Question 2

Are bonus payments to be included in OTE as defined under subsection 6(1) of the SGAA, for the purpose of satisfying the minimum level of superannuation support required under the SGAA?

Advice

No. Refer to 'why we have made this decision'

This advice applies for the following period:

Financial years ended 30 June 2013 to 30June 2016

The arrangement commences on:

1 July 2012

Relevant facts and circumstances

On dd/mm/yyyy you provided information and details of a share plan and bonus scheme relating to a non-resident employee.

Relevant legislative provisions

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

Superannuation Guarantee (Administration) Act 1992 subsection 12(1)

Reasons for decision

Why we have made this decision

The law

Employers and employees are defined under subsection 12(1) of the SGAA as follows:

Subject to this section, in this Act, employee and employer have their ordinary meaning. …

All employers must use ordinary time earnings (OTE) as the earnings base to calculate the minimum super guarantee contributions required for their employees.

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:

(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 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.

Superannuation guarantee ruling

Superannuation Guarantee Ruling SGR 2009/2-Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2) provides the Commissioner of Taxation's view on what constitutes OTE.

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.

The expression 'earnings in respect of ordinary hours of work' or any of the terms in that expression are not defined in the SGAA. The Commissioner's view on the meaning of these phrases and the relationship between OTE and salary or wages is expressed in the following paragraphs of SGR 2009/2 as follows:

7. An amount can only be part of an employee's OTE if it is 'salary or wages' of the employee. But an employee's salary or wages may include amounts that are not OTE.

…

Meaning of 'earnings'

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'.

Bonuses

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.

Share acquisition and rights

Fringe benefits and other non-cash benefits

58. Fringe benefits as defined in the Fringe Benefits Tax Assessment Act 1986 (FBTAA) are excluded under subsection 11(3) of the SGAA.⁵ Additionally, the Commissioner takes the view that other 'benefits', within the meaning of the FBTAA, given by employers to employees that are neither fringe benefits nor salary or wages within the meaning of that Act are not salary or wages for SGAA purposes. For example:

the acquisition of a share, or of a right to acquire a share, under an employee share scheme (within the meaning of Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)),

are not salary or wages for SGAA purposes.

Application of the law to the facts

Question 1 - Share scheme

Summary

The shares issued to the employee under the Share Scheme are not OTE under the SGAA.

Application of the law to the facts

You have advised that the employer operates a Share Scheme. The shares are allocated on the basis of certain conditions, including those of a financial nature, being met. Additionally, you have advised that the employee has received share allocations while seconded to an Australian company. The employee is also likely to have shares allocated after the return to their home country. This allocation will be based on periods when the employee was working in Australia.

As referred to under paragraph 58 of SGR 2009/2, fringe benefits as defined in the Fringe Benefits Tax Assessment Act 1986 (FBTAA) are excluded as salary and wages, and by implication OTE, under subsection 11(3) of the SGAA. However, under section 136 of the FBTAA, a benefit constituted by the acquisition of an ESS interest to which subdivision 83A-B of the ITAA 1997 applies, is not included. Effectively, if shares are acquired at a discount under an ESS they are excluded from being a fringe benefit and will not meet the exception under subsection 11(3) of the SGAA.

Despite this exclusion the Commissioner qualifies his view, by way of example, in providing that the acquisition of shares or, of a right to acquire shares, under an employee share scheme (ESS) does not count as salary and wages for SGAA purposes.

The example refers to Division 13A of Part III of the Income Tax Assessment Act 1936, which was repealed and replaced with Division 83A of the ITAA 1997 with effect from 1 July 2009.

An ESS is defined in subsection 83A-10(2) of the ITAA 1997 and includes schemes under which ESS interests in a company are provided to employees of a company or a subsidiary of a company, in relation to the employees' employment. On this basis the Share Scheme is an ESS under Division 83A of the ITAA 1997, and it follows that the shares issues are not salary or wages for the purposes of the SGAA.

The Commissioner's view as expressed under paragraph 7 of SGR 2009/2 is that an amount which is not salary or wages for the purposes of the SGAA cannot be OTE.

Question 2 - Bonus

Summary

The bonus payments made by the employer under the Bonus Scheme are not to be included in OTE as defined under subsection 6(1) of the SGAA, for the purpose of satisfying the minimum level of superannuation support required for the employee under the SGAA?

Application of the law to the facts

The employer operates a Bonus Scheme.

The employee received bonuses for the last two years and is eligible to receive a bonus for the current year.

Paragraph 29 of SGR 2009/2 states:

…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.

(emphasis added)

In this case, no part of the bonus payment is referable, to results achieved by the employee or any other employee in ordinary hours of work exercised in Australia.

Accordingly, the bonuses paid are not to be included as part of OTE.

We followed these ATO view documents

Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and salary or wages'.