| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051500753563
Date of advice: 1 April 2019
Advice
Subject: Ordinary time earnings
Question
Is a “sign-on’ payment paid to employees on successful vote of an Enterprise Agreement (EA) considered ordinary time earnings (OTE) as defined under subsection 6(1) of the SGAA.
Answer
Yes, the ‘sign-on’ payment is an OTE.
This advice applies for the following periods:
Year ended 30 June 2019; and
Year ended 30 June 2020
The arrangement commences on:
1 July 2018
Relevant facts and 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.
1. The employer is an employing entity.
2. The existing EA expired and the employer has been engaged in extensive negotiations with employees in relation to a new proposed agreement (PA).
3. As encouragement for employees to accept the PA, the employer has offered to make a one off specified payment to all active employees.
4. The payment will be made to employees seven days after the employer submits the PA to Fair Work for approval.
5. The once off payment will be made to all employees covered by the PA regardless of:
● participation in the vote
● employees’ preference in the vote
● time employed by the employer
● seniority within the organisation
● overall performance; and
● whether an employee is on extended leave or unpaid leave (i.e. parental leave) at the time.
Assumptions
No assumptions have been made
Relevant legislative provisions
Superannuation Guarantee (Administration) Act 1992 Subsection 6(1)
Superannuation Guarantee Ruling SGR 2009/2
Reasons for decision
6. As the one off, encouragement payment will be paid to all employees and included in their remunerations, this payment will be assessable income for income tax purposes. As this payment will not be made for overtime or for work performed outside ordinary hours and is not a restrictive covenant, this payment will be OTE.
Summary
7. The ‘sign-on’ payment/bonus is considered OTE.
Detailed reasoning
8. Ordinary time earnings, in relation to an employee, is defined in subsection 6(1) of the SGAA as:
(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.
9. As pre paragraphs 11 and 12 of SGR 2009/2:
11. The SGAA does not define the expression 'earnings in respect of ordinary hours of work' or any of the terms in that expression.
12. 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.
10. An over-award payment is defined in paragraph 21 of SGR 2009/2 as:
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.
11. Paragraph 25 of SGR 2009/2 states that:
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.
12. Paragraphs 60 and 61 of SGR 2009/2 provide a guidance on what payments would constitute salary and wages;
60. The ordinary meaning of the term 'salary or wages' is remuneration paid to employees for their services as employees. In most practical situations, it is straight-forward to determine whether any given payment made in an employment context is salary or wages.
61. The term is not limited to fixed payments made periodically for work performed, such as a worker's fortnightly pay cheque. It extends to certain lump sum payments, bonuses and allowances that are part of the worker's remuneration. These kinds of payment are dealt with in paragraphs 64 to 71 of this Ruling.
13. Paragraph 66 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.
14. Paragraph 71 of SGR 2009/2 then states that:
71. 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.
15. Based on the provided information the ‘sign-on’ payment will be a type of bonus representing one off, encouragement payment that will be made upon acceptance of the PA. As this payment will be paid to all employees covered by the PA and be included in employees’ remuneration, this payment will be assessable income for income tax purposes.
16. As this payment will not be made for overtime or for work performed outside ordinary hours and is not a restrictive covenant, this payment will be OTE.