Pam Roberts
Technical

Employers Beware: proposed Ordinary Time Earnings changes could mean increased super contributions

By Pam Roberts – Technical Services Manager

The ATO has released a Draft Ruling on what is included in Ordinary Time Earnings (OTE) for Superannuation Guarantee (SG) purposes. This Draft Ruling – if and when it is released as a Final Ruling – will replace the current OTE ruling issued in 1994. The start date will be 1 July 2009.

What is included in OTE is very important because since 1 July 2008, the 9% SG contribution is measured using OTE.

A - Key areas of change

1. Leave payments

Payments where a person is on leave are included in OTE regardless of what the leave is for.

  • Maternity, paternity and adoption leave payments will be included in OTE.
    - Under the current 1994 Ruling these payments are excluded.
  • All other leave payments will be included in OTE. These include payments for jury duty leave, leave to serve (e.g. with the reserve forces or volunteer fire services), and release from work duties on paid leave (e.g. between one project finishing and a new project starting).
    - Under the current 1994 Ruling only annual, sick and long service leave payments were included in OTE. Top-up payments for jury duty and serving with the reserve forces have been specifically excluded
    • .
  • Lump sum payments for unused long service leave paid during employment will be included in OTE. (This presumably extends to lump sum annual leave payments made during employment as well.)
    - Lump sum payments in lieu of unused annual, long service and sick leave paid on termination of employment are expressly excluded from OTE under the SG legislation.

2. Payments for ‘ordinary hours of work’

Ordinary Time Earnings are payments for ordinary hours of work. In the Draft Ruling, the ATO has taken a much broader view of what this means.

Normally, OTE is levied in respect of payments for the standard hours in the relevant award, industrial or workplace agreement. However “ordinary hours” are hours “normally, usually or customarily” worked and will include additional hours to that under the award/agreement if this is normal for that particular employee.

  • Regular overtime will be included in OTE; ad hoc overtime continues to be excluded.
    - Under the current 1994 Ruling all overtime is excluded
    • .
  • Where an employee has a regular work pattern that exceeds the standard hours set out in the award/industrial agreement, any payments made in respect of this regular work pattern (whether paid as overtime or penalty rates) will be included in OTE.
    - The test will be if, on an objective assessment of an employee’s regular work pattern, it is “manifestly evident” that the hours worked are longer than under the award/agreement. This is a major change from the current 1994 ruling.
  • Wages paid on a piece-rate basis will be included in OTE.

3. Bonuses

A wider class of bonuses paid to employees are to be included in OTE under the draft ruling.

  • Ex-gratia and discretionary bonuses paid as a reward for services or as recognition of results achieved will be included in OTE. Bonuses that are merely a gift and have no connection to services performed are still excluded (e.g. $250 Christmas bonus paid to all employees).
    - Under the current 1994 Ruling, bonuses that relate to specific performance criteria are included in OTE but ex-gratia bonuses that are not subject to negotiation are excluded
    • .
  • Retention payments will be included in OTE. These are payments made under a contract if the employee is still with the employer after a set period.
    - The 1994 Ruling does not mention these payments
    • .
  • Discretionary incentive payments will be included in OTE. These are payments to employees to encourage future service.
    - The 1994 Ruling does not mention these payments.

4. Allowances

The Draft Ruling makes no changes to the types of allowances that are included or excluded from OTE. However, some allowances that were not previously in OTE may be now included as they relate to the expanded definition of “ordinary hours”. An example would be meal allowances paid for regular overtime (unless this is a fringe benefit).

Payments not included in OTE

The Draft Ruling identifies certain payments that are not counted as OTE that are not mentioned in the 1994 Ruling. These include:

  • Sign-on payments to induce a potential employee (e.g. a sportsperson) to commence employment with an employer.
  • Payments for unused flex leave (as the extra flex time would have accrued in excess of ordinary hours of work).
  • Compensation payments for unfair dismissal.
  • Payments for completing specific training/education.

B - Areas where there are no changes to OTE

The following payments are still included in OTE:

  • Commissions, over award payments, shift loading, penalty rates and casual loadings.
  • Workers compensation payments including top-up payments where the employee performs work.
  • Allowances paid that are a reward for services (e.g. an entertainment allowance paid regardless of whether or not it is actually spent).
  • Allowances paid to compensate an employee for particular working conditions are OTE – shift allowance, danger allowance, dirt, etc.

The following payments remain excluded from OTE:

  • Fringe benefits (including expense allowance fringe benefits).
  • Annual leave loading.
  • Workers compensation payments where no work is performed.
  • Reimbursement allowances or expense allowances (where the amount may be predetermined but is calculated based on an estimate of expenses that will be incurred).

Salary and Wages

Employers who fail to make adequate SG contributions based on 9% of OTE are required to make SG shortfall payments based on the higher amount of “salary and wages”. What is included in “salary and wages” is also set out in the Draft Ruling. Many payments to employees not included in OTE will be included in “salary and wages”.

> Comment

Although the actual legislation hasn’t changed, the ATO has seen fit to replace a nine page Tax Ruling (SGR 94/4) with a 45 page Draft Tax Ruling (SGR 2008/D2). This isn’t a good sign. In their defence, the old 1994 ruling does need a major revamp as there have been significant changes since 1994, including new industrial laws and court decisions clarifying the law. A key development was the Quest case in 2002 where the Federal Court considered the meaning of “ordinary hours of work” for SG purposes.

Arguably, the ATO has drawn a long bow in what they plan to include in OTE, particularly in respect of maternity and paternity leave payments. The logic behind these payments is that “although leave payments are not paid for actual attendance at work or for services, they are paid to satisfy entitlements that accrued by reason of the employee’s overall service” (paragraph 275).

> Employer Action

The commencement date for the Draft Ruling is 1 July 2009, so it will relate to employee earnings from the date. Employers will need to review employee’s remuneration accordingly (particularly where the employee receives overtime) to determine if it is part of ordinary hours.

Another key area for consideration will be maternity/parental leave. Employers who pay maternity/parental leave payments need to be aware that SG will apply not just to those who are commencing maternity/parental leave on or after 1 July 2009, but those who are already on maternity/parental leave and receive payments after 1 July 2009.

Sources: Draft Superannuation Guarantee Ruling 2008/D2 and Superannuation Guarantee Ruling 94/4.