ATO expresses views on the meaning of ‘ordinary time earnings’
The Federal Commissioner of Taxation (Commissioner) recently released his much anticipated Draft Superannuation Guarantee Ruling (SGR 2008/D2) (draft ruling).1
The draft ruling outlines the Commissioner’s proposed interpretation of the term ‘ordinary time earnings’ (OTE) under the Superannuation Guarantee Administration Act 1992 (Cth) (SGAA). To some extent, the draft ruling clarifies the ongoing uncertainty surrounding what is ‘in’ and ‘out’ of OTE for the purposes of calculating superannuation liability. The Commissioner has also usefully provided specific examples of the types of payments that should be included and excluded from superannuation calculations.
However, while some clarification has been achieved, this Ruling, if ultimately adopted and applied by the ATO, will substantially increase some employers’ superannuation liability, particularly in industries:
- transitioning from an earnings base other than OTE (for example, in an award) to the OTE test (following amendments to the SGAA which came into force on 1 July 2008), and
- where overtime is worked regularly and consistently.
The draft ruling is due to be finalised on 6 May 2009. It will apply from 1 July 2009 and will replace the Commissioner’s previous ruling about ‘ordinary time earnings’ (SG Ruling 94/4). Employers with potentially increased superannuation liability as a result of this interpretation have the opportunity to make submissions by 19 December 2008.
In this update, we:
- look briefly at the development of the meaning of OTE
- summarise the payments that are ‘in’ and ‘out’ of OTE for SGAA purposes under the draft ruling
- consider the likely impact of this interpretation, and
- offer some suggestions for employers who might be adversely affected by this interpretation.
‘Ordinary time earnings’ defined
Section 6(1) of the SGAA defines OTE, in relation to an employee, to mean:
(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
(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.
This definition, particularly the concept of ‘ordinary hours of work’, has created considerable confusion regarding its correct construction over recent years.
Various decisions of the courts have examined the meaning of the term ‘ordinary hours of work’, albeit largely in different contexts, which thus far have provided only limited guidance to SG Ruling 94/4 for employers in calculating superannuation liability under the SGAA. Legal opinions differ about the implication of these cases in relation to if and when overtime becomes part of an employee’s ‘ordinary hours of work’ and therefore if and when the earnings for overtime become part of an employee’s OTE.
The Commissioner’s view
Meaning of ‘ordinary hours of work’
The SGAA has not changed in any relevant respect, however the ATO's views do appear to have changed.
The Commissioner’s draft ruling proposes the following interpretation and application of the meaning of ‘ordinary hours of work’:
- an employee’s ‘ordinary hours of work’ are calculated as the hours of work during which it is usual, regular, normal or customary for the employee to work
- where an employee’s terms and conditions are governed by an award or industrial agreement, the standard hours prescribed in that document constitute that employee’s ‘ordinary hours of work’, and
- where an employee has a workplace agreement (whether or not that employee is also covered by an award or industrial agreement), the standard working hours in the workplace agreement are taken to be the ‘ordinary hours of work’.
However, the most significant change proposed by the ATO in the draft ruling provides that where ‘it is manifestly evident from an objective evaluation of the regular work pattern of an employee that the span of hours actually worked are consistently different to the standard working hours provided in an award or an agreement’, the regular work pattern determines the employee’s ‘ordinary hours of work’—regardless of whether or not these hours are remunerated at overtime or penalty rates.
Further, where the ordinary hours of work are not specified or agreed, or the offer of employment specifies the employee’s minimum hours only, the employee’s ‘ordinary hours of work’ will be the hours actually worked in addition to hours of paid leave.
Payments which are part of an employee’s OTE
The draft ruling sets out certain specific types of payments which the Commissioner considers are part of an employee’s OTE. These include:
- over-award payments, whether or not these are paid in relation to an employee’s ‘ordinary hours of work’
- commission payments, whether or not paid in relation to an employee’s 'ordinary hours of work’
- shift loading, whether or not paid in relation to an employee’s ‘ordinary hours of work’
- allowances (other than an expense allowance or an allowance on which FBT is payable) paid in relation to an employee’s ‘ordinary hours of work’, to compensate for particular working conditions, (for example, a location allowance or a retention allowance)
- overtime payments for overtime that is regular, normal, customary or usual
- bonus payments paid as a reward for services during ordinary hours of work
- piece rates, and
- all forms of paid leave.
Payments which are not part of an employee’s OTE
Payments which are not part of an employee’s OTE include:
- termination payments for unused sick, annual or long service leave
- expense allowances where there is a reasonable expectation that the money will be fully expended by the employee in the course of providing services, (for example, travel or mobile phone allowances of a predetermined amount or an overtime meal allowance)
- reimbursements to compensate an employee for an expense incurred on behalf of the employer
- allowances on which FBT is payable
- payments in respect of occasional (not regular) overtime
- Christmas bonuses
- orders of payment as compensation for unfair dismissal, and
- bonuses paid for completing specific training or Christmas bonuses.
Implications of the draft ruling on employers
While there may be some ramifications in relation to allowances, piece rates and bonus payments, it is likely that the major issues and costs to employers will stem from the Commissioner’s interpretation of ‘ordinary hours of work’ in relation to overtime payments.
If there is no change to the Commissioner’s view in the draft ruling of when overtime becomes part of an employee’s ordinary hours of work, not only will there be increased costs for an employer, but it will be a considerable challenge for a business to determine when overtime becomes usual, regular, normal or customary for an employee, and therefore when the earnings on that overtime become part of the employee’s OTE.
Submissions on the draft ruling
The Commissioner has invited submissions on the draft ruling. These submissions are due by 19 December 2008. However, we understand, from informal discussions with the ATO, that it will accept a request for an extension of time to make a submission as it is keen to hear views on this important matter. We suggest that clients who might be affected by the draft ruling make submissions.
There are competing legal views about the ATO’s application of the case law, and the effect of the proposed interpretation. We consider that submissions can be made seeking reconsideration of the interpretation proposed in the draft ruling on a number of grounds, including the effect of the interpretation, which will result in considerable, and in some cases prohibitive, cost to employers in multiple ways, including compliance costs.
Endnotes
1. Draft Superannuation Guarantee Ruling (SGR 2008/D2)
More information
We encourage any clients who are concerned by the changes and would like further information or who are interested in being involved in making submissions to the Commissioner to contact us.