Private ruling: Request for administratively binding advice
Published: June 2012

Ruling: Q1: Is a payment of a profit share arrangement considered ordinary time earnings (OTE) for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA)? | A1: Yes, a payment of a profit share arrangement is considered to be OTE for the purposes of the SGAA.

Relevant facts and circumstances: Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice . You are company. You have an arrangement with a worker whereby the company will quote a price to a client which comprises the projected budget and an additional mark-up. If the product is made within budget, the worker is entitled to a profit share. You advised that amounts were withheld from the payment at the worker's request.

Relevant legislative provisions: Superannuation Guarantee (Administration) Act 1992 6(1).

Reasons for decision: Summary: Whilst the payment is only paid to the worker when the product is made for less than the projected budget it is considered that this creates a sufficient causal connection between payment and the employees' ordinary hours of work. Therefore you are liable to pay superannuation guarantee in respect of the payment made to the worker. | Detailed Reasoning - Detailed reasoning: Subsection 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) a payment in lieu of unused annual leave within the meaning of subsection 26AC(1) of the Income Tax Assessment Act 1936 (ITAA); (C) a payment in lieu of unused long service leave within the meaning of subsection 26AD(1) of the ITAA; and (ii) earnings consisting of over-award payment, 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. Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2) explains that where an employee's 'ordinary hours of work' are not specified in a relevant award or agreement, the 'ordinary hours of work' will be [T]he normal, regular, usual or customary hours worked by the employee, as determined in all the circumstances of the case. This is not necessarily the minimum or maximum number of hours worked or required to be worked…In such cases, it may often not be possible or practicable to determine the normal, regular, usual or customary hours of an employee's work. If so, the actual hours worked should be taken to be the ordinary hours of work. In particular, the SGR 2009/2 highlights (at paragraph 25) that: All amounts of earnings in respect of employment are in respect of the employee's ordinary hours of work unless they are remuneration for working overtime hours, or are otherwise referable only to overtime or to other hours that are not ordinary hours of work. There is no such thing as earnings that are merely in respect of employment generally and are not OTE because they are not in respect of any particular hours of work. Paragraph 28 of SGR 2009/2 explains that lump sum bonuses and similar additional earnings are generally considered to form part of OTE as they can be partly referred to results that have been achieved during ordinary hours of work. This is further clarified by example 22 of SGR 200/2 which states: | Detailed Reasoning - Example 22 - Bonus described as ex-gratia but paid in respect of ordinary hours of work: 167. Nammie is an employee of Tangerine Ltd. As an employee, Nammie was entitled to receive a bonus payment which was labelled an 'ex gratia payment' by the employer. This bonus was paid out of a pool of funds from revenue generated by the work completed by the employees. In order to qualify for payment of the bonus, Nammie was required to achieve a minimum monthly revenue target. However, the employer was also able to exercise discretion to withhold the bonus on disciplinary grounds or pay a bonus to employees who did not meet the minimum monthly target. Payments were made in recognition of the hard work of the staff. | Detailed Reasoning - Salary or wages: 168. The payment made to Nammie is a reward for her services as an employee. 169. Although the bonus payment is labelled an 'ex gratia payment', and is indeed gratuitous in as much as the employer does not necessarily have to pay it, this does not stop it from being salary or wages. There is a causal connection between the payment and the work completed by employees. The payment is not a personal gift unrelated to any work performed. The payment is therefore 'salary or wages'. | Detailed Reasoning - OTE: 170. The bonus is not solely referable to hours of work outside ordinary hours. Therefore the bonus payment is 'in respect of ordinary hours of work' and is therefore OTE. A sufficient nexus must be established between the bonus paid by the employer and the ordinary hours of work of the employee. Whilst the payment is only paid to the worker when the product is made for less than the projected budget it is considered that this creates a sufficient causal connection between payment and the director's ordinary hours of work. The determination of whether the budget is met relates in part to the number of hours worked by the worker to ensure the product comes within the projected costs and the workers ability to work with the team to ensure the production costs comes within the projected costs. It is therefore considered that the payment is a performance related payment. Therefore you are liable for superannuation guarantee obligations in respect of the payment made to the director.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | This advice applies for the following period: 1 July 2011 - 30 June 2013