As employers will be well aware, amendments to the Superannuation Guarantee (Administration) Act 1992 (SGAA) commenced on 1 July 2008 introducing 'Ordinary Time Earnings' (OTE) as the earnings base against which employers are required to calculate the minimum SG contributions payable in respect of eligible employees.
Four months on and employers could be forgiven for assuming that the administrative headache associated with reviewing employee payments and updating payroll systems was well and truly behind them.
However, two recent developments again highlight the uncertainty that surrounds the interpretation of the SGAA and indicate that further changes in the SG arena may yet be in sight.
Draft Superannuation Guarantee Ruling SGR 2008/D2 – 'OTE' and 'salary or wages'
On 5 November 2008, the ATO released a draft SGR 2008/D2 explaining the Commissioner's view on what constitutes 'OTE' and 'salary or wages' for the purposes of sections 6(1) and 11 of the SGAA.
Comments on the draft are due by 19 December 2008 and it is proposed that when the final ruling is issued it will replace SGR 94/4 and SGR 94/5.
As employers will be aware, whilst the application of the SGAA has always been somewhat uncertain, SGR 94/4 and 94/5 have proved useful reference tools in understanding whether the Commissioner is likely to consider a payment to form part of an employee's OTE or salary or wages.
Whilst employers will welcome much of the updated commentary and additional worked examples in the draft ruling (see for example the commentary related to bonuses and allowances), of more concern are the areas which reflect a marked departure from the established view expressed by the Commissioner in SGR 94/4 and 94/5.
Key changes include:
- with the exception of accrued payments made on termination of employment, all forms of leave payments are considered to be OTE. This is a clear departure from SGR 94/4 where payments in respect of parental leave and jury duty were specifically excluded from OTE
- a more expansive view of the term 'ordinary hours of work' is taken so that onus is placed on the actual hours worked by an employee, rather than hours agreed between the employee and employer in an agreement or award. This impacts upon whether a payment can be considered to have been made in respect of overtime or ordinary hours of work
- there is no reference to dividends and trust distributions, which until now have been listed as items that are excluded from OTE. This uncertainty may impact upon employee share schemes that have until now been considered non superable.
The draft ruling can be found here:
Bonus payments and OTE
A recent decision of the Administrative Appeals Tribunal (AAT) provides valuable guidance to employers as to whether bonus payments paid to employees are OTE.
In Re Prushka Fast Debt Recovery Pty Ltd and FCT, the AAT reviewed a decision of the Commissioner to impose SG charge on an employer for failing to include certain bonus payments made to employees within the employees' OTE when calculating its minimum SG contributions.
Prushka was a company that carried on a debt recovery business. As an incentive to its staff, Prushka established a profit-share bonus scheme for certain eligible employees.
A bonus pool of funds was established when sufficient surplus from profits was generated in any particular month. Minimum debt recovery targets were set for collections staff and the achievement of those targets was a precondition to entitlement to share in the bonus pool. Underperforming staff were not eligible.
According to Prushka, payment to eligible employees was made on an ex gratia basis out of the fixed pool i.e. payments were only made in any given month if the business as a whole reached specified revenue targets. Prushka retained the right at all times not to pay any money from profits in any particular month.
The Commissioner took the view that the bonuses were paid in an employment context and by reference to the specific performance of the employees as a group. The payments were therefore considered to be 'earnings in respect of ordinary work' and were OTE as defined in the SGAA.
The AAT upheld the Commissioner's finding that a SG shortfall existed and held that the bonus payments were OTE.
In doing so, the AAT found that the bonus scheme was established to provide an incentive to employees so that, if they were reasonably diligent in recovering debts on behalf of the employer's clients, a proportion of those commissions earned would be applied to a bonus pool for which they could become eligible. The bonus pool was therefore directly related to the work efficiency of the employees.
Importance was placed on the underlying activity which gave rise to eligibility for the bonus payment (the collection of debts) and the underlying purpose of the SGAA (to encourage employers to make payments to superannuation funds for the benefit of their employers) so that a causal relationship between the bonus payment and the activity was found to exist.
The fact that Prushka retained a discretion to make the payment did not convert the payments into ex gratia payments. The AAT held that the description of the bonus in company documentation, could constitute a representation sufficient to legally force payment and it was therefore incorrect to describe the payments as ex gratia.
Key considerations for employers
Employers should note:
- careful consideration needs to be given to the way in which bonus payments are described in employee contracts, awards, agreements and any company policies; and
- if a payment is related to pre-determined criteria, then the fact that an employer retains absolute discretion as to payment may be irrelevant.
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