Article by Richard Ottley and Myles Engelen
A recent ruling made by the Commissioner of Taxation on the Superannuation Guarantee directs attention to an area of law that for some employers, largely slips under the radar. The Commissioner in his recent ruling, has expanded the definition of 'ordinary time earnings' (OTE), meaning employers will be obliged to contribute superannuation on an increased number of payment types made to employees.
What is the significance of the Superannuation Guarantee Ruling 2009/2?
From 1 July 2009, employers will (in addition to previous requirements), need, amongst other things, to include payments made in lieu of notice and certain ex-gratia bonuses, when assessing their employees' accumulations of OTE. Their employees' accumulation of OTE in any given quarter, will inform an employer's obligations to make superannuation contributions (for example in the 08- 09 financial year employers were required to contribute super based on an employee's accumulation of up to $38,180 in a quarter).
What are ordinary time earnings?
OTE are defined as "earnings in respect of ordinary hours of work" in subsection 6(1) of the Superannuation Guarantee (Administration) Act 1992 (the Act) and this definition is used by employers for calculating the minimum level of superannuation contribution. The term "earnings" is consistently held to mean "salary or wages", while the phrase "ordinary hours of work" is consistently held to mean "the hours specified as an employee's ordinary hours of work under the relevant award or agreement" or "normal, regular, usual or customary hours worked by the employee" where they are otherwise unspecified. The application of these two definitions to different types of payments in determining whether they fall under OTE has been less consistent however.
Overtime is regarded as hours worked outside an employee's ordinary hours of work. It is not limited to time worked outside of 9am through 5pm, Monday through Friday.
What did ordinary time earnings include before the Superannuation Guarantee Ruling 2009/2?
Under the previous Superannuation Guarantee Ruling (SGR), SGR 94/4, OTE included:
- Directors' fees.
- Remuneration while an employee was on annual leave, sick leave or long service leave.
- Allowances where there was no expectation for the allowance to be expended in the course of employment. These allowances included payments where the employee had the spending discretion, danger allowances, retention allowances and on-call allowances in relation to ordinary hours of work for doctors. Not included were fringe benefits and payments made for the reimbursement of expenses.
- Bonuses and commissions calculated by reference to work undertaken and sales made during ordinary hours of work.
- Casual and shift loadings.
- Top-up payments when the employee worked.
- Government subsidies in the place of wages.
What will ordinary time earnings include after 1 July, 2009 under the Superannuation Guarantee Ruling 2009/2?
Under the new SGR 2009/2, OTE includes all the types of payments above plus, amongst other things:
- Payment in lieu of notice.
- Ex-gratia bonuses (including Christmas bonuses).
Payments in lieu of notice on termination did not, under the previous ruling, form part of the employee's OTE, and therefore the employer was not required to include such sums in assessing its liability for super contributions. The position has now changed and employers will need to include such payments.
The treatment of Christmas bonuses has also changed, with the Commissioner now taking the view that Christmas bonuses will be considered part of the employee's OTE as a reward for services in respect of work performed (despite the label given). The position will be otherwise only in rare case such as: where the payment is very small (say less than $100), there is a clear family or private connection with the employee, or where the bonus is solely referable to hours of work outside ordinary hours.
Is the Superannuation Guarantee Ruling 2009/2 law?
SGR 2009/2 is the opinion of the Commissioner on legislation such as the Act. It is an opinion provided to employers on how to calculate their superannuation obligations, and explains how the Australian Tax Office (ATO) will calculate and seek to enforce superannuation obligations . Together with other tax rulings and determinations, SGR 2009/2 is not law although in effect it functions as such.
If an employee believes they are entitled to superannuation contributions that have not been paid, they can contact the ATO to calculate their superannuation entitlements under SGR 2009/2, and consequently enforce these entitlements. If it is found after investigation that the employee is entitled to superannuation, a private ruling will be issued to the employer. A superannuation debt payable to the employee and penalties payable to the ATO will be established.
What are the implications of the Superannuation Guarantee Ruling 2009/2 for industries and individual employers?
SGR 2009/2 will cost employers more in the form of increased compulsory superannuation contributions, as well as provide further compliance pitfalls that may translate into penalties if obligations are not adhered to.
The super ruling is located on the ATO website at http://law.ato.gov.au/atolaw/view.htm?dbwidetocone=06%3AATO%20Rulings%20a.
Swaab was recently named a 2009 Winner in the ALB Employer of Choice awards, and was winner 'Best Law Firm in Australia (Revenue < $20m)' and 'Attribute Award for Exceptional Service (Australia Wide)' in the 2008 BRW- Client Choice Awards.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.