Pam Roberts
Technical

ATO Back Flips on Ordinary Time Earnings for Super Guarantee

By Pam Roberts

Superannuation Guarantee Ruling 2009/2 (released 13 May 2009)

Employers can breathe a sign of relief. The ATO has released the final tax ruling on ordinary time earnings for Super Guarantee purposes and have advised that overtime payments will NOT be included in Ordinary Time Earnings, as was originally proposed.

Ordinary Time Earnings (OTE) is of critical importance to employers, as since 1 July 2008, it is the basis for calculating of the 9% Super Guarantee contribution. Under the draft tax ruling released earlier this year, regular worked overtime was to be included in OTE from 1 July 2009.

However after much criticism, the ATO has returned to its 1994 position that overtime is not to be included in OTE. In the final ruling the ATO advised that OTE is payment for ordinary hours of work, and that an employee’s ordinary hours of work are determined from the award or agreement or contract of employment. Payment for hours outside these ordinary hours (i.e. overtime) is excluded from OTE. Where ordinary hours of work are not specified in the award/agreement/contract, an employee’s ’ordinary hours’ will be those regularly or usually worked. If this cannot be determined, then ordinary hours are the actual hours worked.

The ATO has also put off including in OTE, payments received for maternity and paternity leave and other ancillary leave (e.g. jury duty and service leave top up payments). Holiday pay remains part of OTE. The Government is undertaking a review of maternity/paternity leave issues (including SG contributions) in the light of the maternity leave initiative announced with the Budget.

Comment:
This is a welcome move by the ATO. Not only was the draft ruling confusing and hard to implement, it would have resulted in increased employment cost to employers at time when many employers can least afford it.

Employers Alert: Review employee salary sacrifice arrangements now in the light of lower contribution caps for 2009/10.

Employers and financial advisers should consider reviewing salary sacrifice arrangements now, to ensure that:

(a) Employees take whatever advantage they can of higher 2008/09 concessional caps; and

(b) Come 1 July 2009, salary sacrifice arrangements into super do not breach the reduced concessional contributions caps.

Employers should be looking at this now, even though the legislation has not passed through Parliament as, to be effective, salary sacrifice arrangements need to be set in place before the remuneration is earned.

E.g. Tom is a 47 year old executive with WER Pty Limited on a total salary package of $220,000 p.a. (including super), paid monthly. During 2008/09 Tom salary sacrificed $40,000 into super to get his assessable income down to the $180,000 marginal tax threshold. As a consequence of the Budget announcements, Tom enters into a new salary sacrifice arrangement from 1 June 2009 providing:

(a) For the month of June 2009, an extra $10,000 to be paid into super (making a total of $13,333 salary sacrifice for the month and $50,000 for the year); and

(b) From 1 July 2009, salary sacrifice contributions to super to reduce to $25,000.