Edited version of private advice

Authorisation Number: 1051574487978

Date of advice: 6 September 2019

Advice

Subject: Superannuation guarantee

Question

Is the lump sum payment to be made to the deceased's estate as a gift on compassionate grounds at the discretion the employer, considered ordinary times earnings (OTE) for the purposes of subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (SGAA))?

Answer

No

This advice applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The arrangement commences on:

1 July 20XX

Relevant facts and circumstances

You are an Australian proprietary company, limited by shares, deriving revenue from the provision of wealth and investment management services, as well as securities brokerage and other related financial services.

The taxpayer, with below background, who was due to join you as a managing director in mth/20XX, passed away before the taxpayer could commence employment:

·         The taxpayer was a Country A citizen and a permanent resident of Australia holding a Resident Return Visa

·         The taxpayer was living and working in Australia prior to signing the employment contract and was regarded as a resident of Australia for income tax purposes

·         The taxpayer passed away in mth/20XX.

Your contract of employment with the taxpayer was on a permanent basis, signed on XX/mth/20XX and the taxpayer was scheduled to commence employment in mth/20XX.

The target start date of employment was XX/mth/20XX. The contract of employment was also dependent on the taxpayer fulfilling conditions precedent criteria such as background check clearances.

Clause 4.4.3 of the taxpayer's permanent contract of employment states that the taxpayer would (subject to fulfilling certain conditions, and upon commencement of employment) receive a New Hire Award (Bonus Buyout) to compensate the taxpayer for the loss of unvested restricted shares, unvested options, deferred cash and/or loss or forfeiture of a 20XX bonus due to the commencement with you.

Notwithstanding the taxpayer not commencing employment for the purposes of the New Hire Award (Bonus Buyout), you would like to pay an amount equivalent to the above Bonus Buyout amount, to the deceased's estate in lump sum as a gift on compassionate grounds.

Making of the payment is at your complete discretion.

Relevant legislative provisions

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

Reasons for decision

The Commissioner's view on what constitutes 'salary or wages' is outlined in Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2). Paragraph 241 of SGR 2009/2 states that 'salary or wages' constitutes remuneration paid to employees for their services as employees, and presupposes an employment relationship.

Subsection 6(1) of the SGAA 1992, defines OTE as follows:

          (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

                C.      (Repealed by No 15 of 2007)

                             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.

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.

Paragraph 12 of SGR 2009/2 provides the meaning of 'earnings', and paragraphs 13 to 18 of SGR 2009/2 outline the meaning of 'ordinary hours of work'.

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'.

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.

In your case, you advised that you would like to pay USD 795,885.00 equivalent to a bonus buyout to compensate the taxpayer for the loss of invested restricted shares, unvested options, deferred cash and/or loss or forfeiture of the 2018 bonus due to his commencement. This payment will be made on compassionate grounds, and not contractual grounds, and therefore you submit the payment is characterised as a gift and made at your complete discretion.

As the payment is not related to services as an employee, the payment is not salary or wages and therefore cannot be OTE for SGAA purposes. The payment in this case is not subject to superannuation guarantee.