Edited version of your written advice

Authorisation Number: 1051283527774

Date of advice: 23 November 2017

Ruling

Subject: Superannuation Guarantee – Discretionary payments

Question

Do discretionary payments received by employees form part of an employee’s ordinary time earnings (OTE) in accordance with subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Answer

Yes

This ruling applied for the following period

Year ended 30 June 2017

This scheme commenced on

1 July 2016

Relevant facts and circumstances

A fund has been established to enable discretionary payments to be made to some employees whose long service leave has been brought into line with other public sector employees following amendments to relevant legislation.

The decision maker (DM) will consider applications and will have the complete discretion to decide what payments will be made from the fund.

There will be no access to adjusted leave in lieu payments.

The DM’s decisions on applications will be a matter for their complete discretion, and will not be subject to correspondence, review or appeal.

An invitation to apply for a discretionary payment was made by both public advertisement, Department circular and notation on successive payslips.

Any person believing that they had an entitlement could apply.

To be eligible for a discretionary payment, applicants must:

● Be a natural person (trusts, estates, corporate or unincorporated entities are not eligible to apply);

● Have been employed under an Act;

● Have been employed as a specified employee at some time between certain dates;

● Not have had any break in service of two years or more between certain dates;

● Have had seven years of continuous service not interrupted by:

● Resignation; or

● Dismissal

● Not have been the recipient of:

● A targeted voluntary separation package; or

● A redemption payment or other settlement arising out of compensation claims under the relevant Worker’s Compensation legislation which accompanies termination of employment.

Although this criteria will be used to assess who is eligible for payments and how much any payments will be, the applicant was able to request the DM in considering the criteria to take into account their particular circumstances.

Following the closing date of applications, the Department notified the DM of the number of applications received.

The Department will collate and prepare information for the DM to assist them to exercise their discretion. Such information will include:

● Whether the applicant was and/or is employed as a specified employee.

● Whether the applicant is eligible to apply in accordance with the matters set out above.

● The length of service of the applicant.

● The difference between the monetary value of the long service leave entitlement accrued under the “three months plus vacation” formula and the monetary value of the long service leave accrued under the “two year” formula (as at a specified date).

● Identification of incomplete or inaccurate service records and any estimation(s) made as a consequence.

● Any past overpayments not recovered or overstatements of long service leave.

● Matters submitted by the applicant in support of their application.

● The total number of applications received.

● The total number of potentially eligible applicants and the total number of ineligible applicants.

● The estimated total monetary value of long service leave of all applicants extinguished by the amendment; and

● Information about each application.

Decisions will be made only after all applications have been considered. The DM will have complete discretion to decide what payments will be made. Each applicant will be notified of the DM’s decision. The DM’s decision will not be subject to review or appeal.

Relevant legislative provisions

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

Reasons for decision

Discretionary payments paid to an employee where the payment is in relation to an employee’s ordinary hours of work form part of the employee’s Ordinary Times Earnings (OTE) as defined by subsection 6(1) of the SGAA and consequently salary and wages for SGAA purposes.

Meaning of 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 2008/09 year of income is $38,180 per quarter. This amount is indexed annually according to the indexation factor.

The Commissioner’s views on OTE as defined in subsection 6(1) of the SGAA, including bonuses, are contained in Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms ‘ordinary time earnings’ and ‘salary or wages’. OTE are generally what employees earn for their ordinary hours of work, including commissions, allowances and paid leave and do not include overtime.

The SGAA does not define the expression of ‘earnings in respect of ordinary hours of work’ or any of the terms in that expression.

Earnings

Paragraph 12 of SGR 2009/2 explains that for the purposes of the definition of OTE, an employee’s ‘earnings’ is the remuneration paid to the employee as reward for the employee’s services. The practical effect for SGAA purposes is that the expression ‘earnings’ means ‘salary or wages’.

Ordinary hours of work

The meaning of ‘ordinary hours of work’ is discussed in SGR 2009/2. Paragraph 13 of the Ruling states that the ordinary hours of work may be specified in an award or agreement, in which case the specified hours of work are also the ordinary hours of work under the SGAA.

If an employee is not covered by an award but has agreed to work a certain number of hours, those hours will be the employee’s ordinary hours of work (paragraph 16 of the Ruling). The hours agreed will be determined in light of all the circumstances, such as the hours actually worked, the industry norm, or what is contained in any written agreement. If the ordinary hours of work are not specified or agreed, paragraph 17 of SGR 2009/2 provides that the ordinary hours of work will be the hours actually worked by the employee.

Earnings in respect of ordinary hours of work

Under subsection 6(1) of the SGAA, all payments made in respect of an employee’s ordinary hours of work are OTE.

Paragraph 25 of SGR 2009/2 states:

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

Therefore, any earnings paid in respect of (in connection with) an employee’s ordinary hours of work will be OTE for the purposes of the SGAA.

Bonus payments

Paragraphs 28 to 29 of SGR 2009/2 outlines the Commissioner’s view on bonuses with respect to an employee’s OTE. These paragraphs 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.

Paragraph 274 of SGR 2009/2 provide further clarification of our view on bonuses and like payments.

Paragraph 274 of SGR 2009/2 states that:

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.

Application to your circumstances

● A discretionary payment 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.

● Additional earnings received as a reward for good performance, and other ‘bonus’ like payments, are OTE in most cases.

● All amounts of earnings in respect of an employment relationship, 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.

The payments are made to an employee by reason of their services as an employee and not on a personal basis. The payments are not referable only to overtime or to work performed entirely outside ordinary hours.

Conclusion

As the payments are only to be made to employees with relevant service as an employee and not on a personal basis the discretionary payments will be OTE for SGAA purposes and will be subject to subject to superannuation guarantee in accordance with the SGAA where the individual is a current employee or former employee.