Superannuation guarantee charge - international dimensions

Key Points:

Where an organisation operates in more than one country, it may be necessary to refer to international treaties to find out whether the work is done outside Australia or whether an international social security agreement applies.

Globalisation presents the world with a range of opportunities and challenges. For human resource departments and superannuation practitioners, one challenge is the application of the superannuation guarantee legislation.

Introduction

Where an organisation operates in more than one country, there are a range of exemptions under s 27 of the Superannuation Guarantee (Administration) Act 1992 (SGAA) that can potentially apply to take a worker outside of the compulsory superannuation regime. Before advising on whether an employer is required to pay superannuation contributions for an employee, I suggest finding out answers to the following:

• Is the employer a resident of Australia for the purpose of the Income Tax Assessment Act 1936 (ITAA36)?
• Is the employee a resident of Australia for the purpose of the ITAA36?
• Will the work be done outside Australia?
• Will the work be done in the Joint Petroleum Development Area?
• Does a scheduled international social security agreement apply to prevent double coverage of the compulsory retirement savings arrangements?
• What (if any) visa or entry permit will the employee hold?
• Will the employee's position carry substantial executive responsibility?

In this article, I will look in more detail at issues around determining whether work is done outside Australia, foreign currency denominated employment contracts and international secondments.

When is work done outside Australia?

Under s 27(1)(a) and (b) of the SGAA, salary or wages paid for work done outside Australia are not to be taken into account for the purpose of making an individual superannuation guarantee shortfall calculation where either the employer or the employee is not a resident of Australia. It is therefore important to know whether work is being done outside Australia. Often this is straight forward, but with some work, such as petroleum drilling at sea, careful consideration needs to be given to the meaning of "Australia" for the purpose of the SGAA.

The SGAA does not define "Australia". However, s 15B(1) and (2) of the Acts Interpretation Act 1901 (AIA) provides that a reference in an Act to Australia is taken to include a reference to the coastal sea of Australia and an Act is taken to have effect in, and in relation to, the coastal sea of Australia as if that coastal sea were part of Australia. Subsection (4) provides that "coastal sea" includes the territorial sea of Australia and the territorial sea adjacent to an external territory and the airspace over, and the sea bed and subsoil beneath, those seas.

The AIA provides that "territorial sea" has the same meaning as in the Seas and Submerged Lands Act 1973, which in turn provides that "territorial sea" has the same meaning as in Arts 3 and 4 of the United Nations Convention on the Law of the Sea done at Montego Bay on 10 December 1982 (Convention). Rather than defining "territorial sea", those articles provide that every state has the right to establish the breadth of its territorial sea up to a limit not exceeding 12 nautical miles measured from baselines determined in accordance with the Convention and that the outer limit of the territorial sea is the line every point of which is at a distance from the nearest point of the baseline equal to the breadth of the territorial sea. Generally, the territorial sea of Australia ends 12 nautical miles from the territorial sea baseline, but in the Torres Strait, the territorial sea surrounding many islands is limited to three nautical miles or less.¹

Advising on whether work done on an oil rig is work done outside Australia, typically involves obtaining a map showing the location of the rig and the territorial sea borders. Instructions such as "the rig will be more than 200 km west of Broome" provide an inadequate basis on which to advise because the proximity to various islands can be the deciding factor, rather than proximity to the mainland. For example, the territorial sea includes part of the sea around Rowley Shoals, which are located about 260 km west of Broome. Further investigation is also required where instructions are received that a rig will be located in Australian waters. The person providing the instructions could be referring to the territorial sea, the contiguous zone or Australia's exclusive economic zone. The contiguous zone and the Australia's exclusive economic zone extend beyond the territorial sea and work done in them is work done outside Australia for the purpose of the SGAA.

An employee's role can involve doing work both inside and outside Australia. For example, over a 14 day roster, an employee might spend eight days on a rig in the contiguous zone and two working in a Perth office. With that type of roster, if either the employer or the employee is not a resident of Australia, part of the employee's salary will be excluded and, unless another exclusion applies, the salary will need to be apportioned between work done inside Australia and work done outside in order to determine the superannuation payable.

Technology also has the potential to raise issues around whether work is being done outside Australia. Consider, by way of example, a person employed by a broking business in the United Kingdom who telephones a small number of people in Australia to buy parcels of shares on the London Stock Exchange. Imagine that this employee has recently moved from Australia to the United Kingdom, continues to hold investments in Australia and remains a resident of Australia for the purpose of the ITAA36. In Regulatory Guide 121:
Doing financial services business in Australia, ASIC suggests that the broking business is likely to need an AFS licence, because it is likely that it is carrying on a financial services business in Australia.² Given a financial services business can be carried on in Australia without a presence in Australia, there is an argument that work could be done inside Australia by an employee who is located outside Australia.

Foreign currency denominated contracts

Some employees who are residents of Australia and perform work here for an employer based abroad have employment contracts that provide for salary or wages denominated in a foreign currency. Ordinary time earnings for these employees in Australian dollars will vary from quarter to quarter due to exchange rate movements. As a result, the amount of contributions required to be made to a complying superannuation fund for the employee for the quarter to reduce the charge percentage to zero and avoid a liability for the Superannuation Guarantee Charge will also vary. This variability means that the employer retains a foreign exchange risk, despite the contract being denominated in the employer's local currency. It also complicates the calculation of an employer's individual superannuation guarantee shortfalls in the event that the employer fails to make the minimum contributions.

Employees seconded from overseas

Subsections (2)–(1 1) of s 12 of the SGAA expand the meaning of the terms "employer" and "employee" beyond their ordinary meaning. In particular, subs (3) provides that if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.

A secondment typically involves an employer entering into a secondment agreement with a client or a foreign affiliate under which the employer provides the labour of one of its employees in return for a fee and the employer agrees that it will remain solely responsible for the payment of the employee's remuneration. An argument could perhaps be made that a secondment agreement is a contract that is wholly or principally for the labour of the seconded employee and that s 12(3) deems the seconded employee to be the employee of the client or affiliate. If that argument were to succeed, an employee seconded within Australia would have two employers and double coverage under the SGAA.

Superannuation Guarantee Ruling 2005/1 stands in the way of that argument. It clearly states that where an individual performs work for another party through an entity such as a company or trust, the individual is not an employee of the other party to the contract because the company or trust has entered into the contract and not the individual.³ Likewise, the ruling states that if a partnership has contracted to provide services, a partner who provides the services is not an employee of the other party to the contract, even if the contract required the partner to do the work.⁴ The same logic applies where an employee is seconded by an overseas affiliate to work in Australia. The secondee would not be characterised as an employee of the local entity, because secondee has not entered into the contract.

Conclusion

The repeal of s 13 of the SGAA, which provided for a notional earnings base where superannuation contributions were made for the benefit of certain employees before 21 August 1991, significantly simplified the application of the SGAA. Nonetheless, pockets of complexity remain.

Where an organisation operates in more than one country, it may be necessary to refer to international treaties to find out whether the work is done outside Australia or whether an international social security agreement applies. It strikes me that this complexity is justified by the complexity of the subject matter. Likewise, the exclusion for prescribed employees in s 27(1)(d) of the SGAA and reg 7 of the Superannuation Guarantee (Administration) Regulations 1993 is complicated due to the range of visas and executive positions that it covers. However, reg 7 could be simplified by rewriting it to remove or correct some of the existing cross-references to the Migration Regulations 1994. Schedule 2 to the Migration Regulations 1994 no longer contains a reg 457.223(5)(d) or a reg 457.223(3)(b)(i).

This article was first published in the Australian Superannuation Law Bulletin, March 2013

Footnotes

¹"Australia's Offshore Jurisdiction: Explanation of Terminology in relation to Petroleum Exploration and Development",www.ret.gov.au.

²Above, n 1, at 17.

³Above, n 1, at [13].

⁴Above, n 1, at [14].

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.