The ATO’s new Super Guarantee rules explained

The ATO recently released a very important ruling – Superannuation Guarantee Ruling SGR 2009/2 – that explains the tax commissioner’s view on the meaning of Ordinary Time Earnings and ‘salary or wages’ as defined in the superannuation law.

It is a lengthy ruling and quite technical, but important for employers to be aware of in meeting their legal requirements to make superannuation payments for their employees.

I will try to cover its main points without getting too buried in the technicalities. Of course, employers should consult their advisers where they have any doubts.

Since 1 July, 2008, employers have been required to use OTE as the earnings base when calculating the 9% minimum level of quarterly superannuation guarantee support for their employees. Employers may still use the notional earnings bases specified in the superannuation law (specifically, the Superannuation Guarantee – Administration – Act 1992) or industrial agreements, provided those bases are above an employee’s OTE.

The term OTE is relevant to employers for the purpose of calculating the minimum level of superannuation payments required for employees. If employers provide less than the required minimum level of contributions, they will be liable to pay a non-deductible superannuation guarantee charge on the superannuation guarantee shortfall for an employee, which is calculated using ‘salary or wages’.

The Ruling states that payments included in OTE are also included in salary or wages. It also states that payments specifically excluded from OTE are not necessarily excluded from salary or wages. In other words, ‘salary or wages’, as defined, has a broader concept than OTE.

Parental leave and top-up payments

The Ruling notes that the Government announced in the 2009 Federal Budget on 12 May, 2009 that it intends to clarify the superannuation guarantee status of certain kinds of leave payments. Accordingly, it does not deal with the status of payments made to employees who are on parental leave. The Ruling also does not deal with the status of payments made to employees who are on other ancillary kinds of leave, including ‘top-up payments’ (eg those made while serving on jury duty or with defence reserve forces).

Ordinary time earnings

The definition of OTE prescribes a requirement that earnings be in respect of ordinary hours of work. However, the terms ‘earnings’ or ‘ordinary hours of work’ are not specifically defined in the super law.

The commissioner’s view is that the term ‘earnings’, for the purpose of superannuation guarantee, is the remuneration paid to the employee as a reward for the employee’s services, which for practical purposes means ‘salary or wages’.

Ordinary hours of work

The commissioner considers that an employee’s ‘ordinary hours of work’ are the hours specified in the relevant award or agreement (or a combination of such documents) as the employee’s ordinary hours of work. The Commissioner notes that while the documents need not use the exact phrase ‘ordinary hours of work’, a genuine distinction must be drawn between ordinary hours and other hours (commonly described as overtime payments). In particular, the Commissioner states that he will expect the other hours are remunerated at a higher rate. The Commissioner also states that any hours worked in excess of, or outside the span of, specified ordinary hours of work, do not form part of the employee’s ‘ordinary hours of work’.

Where the ordinary hours of work are not specified in the relevant award or agreement, the ‘ordinary hours of work’ are the normal, regular, usual or customary hours worked by an employee, as determined by reference to the circumstances of the case. The Ruling states that if it is not possible or practicable to determine those hours, the actual hours worked by the employee should be taken to be the ordinary hours of work.

The Ruling notes that ‘ordinary hours of work’ are not confined to hours to be worked between 9am and 5pm, Monday to Friday. It says ordinary hours of work can include night and weekend shifts. It also notes that the total of OTE in respect of an employee for a quarter can not exceed the maximum contribution base for the relevant quarter (the maximum contribution base per quarter for the 2008-09 income year is $38,180).

Treatment of specific payments

The tax commissioner provides his view on whether certain payments received by employees are OTE. These payments include:

• Overtime – Payments for work performed during hours outside an employee’s ordinary hours of work are not OTE. This is so, whether the payments are calculated at an hourly rate or the employee gets a specific loading, or an annualised or lump sum component of a total salary package that is expressly referable to overtime hours as remuneration for overtime hours worked. However, the Ruling notes that some employees, particularly some managers and professionals, receive a single un-dissected annual salary within a remuneration package that recognises in a non-specific way that the employee may often be expected to work more than the ordinary hours of work prescribed. The whole amount of salary payable under such a package is OTE, unless overtime amounts are distinctly identifiable and expressly referable to overtime hours.
• Commission – Payments to an employee, such as a salesperson on the basis of the volume of sales he or she achieves or similar criteria, are always OTE (except in the unusual case where they can be shown to be wholly referable to overtime hours worked).
• On-call allowance – These are payments to an employee for making himself or herself available at certain times to be called in to work if needed. This entitlement is separate from the salary or wages he or she will receive if actually called in. If paid in respect of hours that the employee is not otherwise working, these payments are not OTE. However, in some cases, on-call allowances are paid as a loading on the salary of an employee received for ordinary hours of work. For example, some doctors employed by hospitals are paid an extra hourly allowance, while carrying out routine duties in ordinary hours of work, to make themselves available to perform urgent surgery if required. Payments of that kind are OTE (except of course to the extent that they are paid in respect of overtime hours).
• Allowances and loadings – These kinds of payments to recognise or compensate employees for certain employment conditions are OTE (to the extent they are not ‘salary or wages’ or relate solely to hours of work other than ordinary hours of work). Examples include a site allowance, casual loading, dirt allowance or freezer allowance.
• Bonuses – Additional earnings received as a reward for good performance (eg performance bonuses) and other ‘bonus’ payments (eg Christmas bonuses) are, generally, OTE.
• Over-award payments – Are components 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.
• Shift-loading – A shift-loading is an amount paid to a worker in addition to his or her basic hourly rate for having to work outside the usual span of time for day workers. Shift-loadings payable on ordinary hours of work must be distinguished from overtime payments under awards and agreements. Often these are mutually exclusive under awards and agreements, but if an employee is entitled to a shift-loading in respect of hours other than ordinary hours of work, the commissioner’s view is that the specific inclusion of shift-loadings does not apply in that circumstance.
• Piece rates – All wage payments made on a piece-rate basis are included in an employee’s OTE, unless the employee is subject to an award or agreement that specifies his/her ordinary hours of work.
• Paid leave and holiday pay – Amounts received by an employee in respect of annual leave, public holidays and rostered days off are OTE. However, lump sum arrears payments of unused leave, sick leave or long service leave are not OTE.
• Payments in lieu of notice – An amount that an employee receives in lieu of notice concerning termination of employment is OTE.
• Workers’ compensation payments (employee required to work) – Payments made by an employer or on their behalf (eg by an insurance company) are part of an employee’s OTE only if they are ‘salary or wages’ paid in respect of ordinary hours of work.
• Directors’ fees – All fees paid to a company director are earnings in respect of the director’s ordinary hours of work and, therefore, OTE.

The above is a brief overview of the ruling. It is clearly important for employers to know and understand the basis upon which they are required to pay superannuation for their employees. It is a legal requirement, and penalties apply where the relevant laws are not complied with. If in doubt, consult your accountant or adviser.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.