Private ruling: Superannuation Guarantee - Ordinary Time Earnings
Published: February 2012

Ruling: Question One | Will an ex-gratia annual lump sum payment made by the entity to any of its employees who are provided with vehicles for use in their employment, and other fringe benefits, be considered part of ordinary time earnings (OTE) as defined in subsection 6(1) of the Superannuation Guarantee Administration Act 1992 (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. The employer provides vehicles to employees for use in their employment. The employer is proposing to make annual lump sum payments to these employees. The payment will enable the employees to make post-tax contributions towards the running costs associated with the vehicles. The employer will use the post-tax contributions to reduce the taxable value of car fringe benefits to nil. The payment will be subject to pay as you go withholding (PAYGW). The employee's post-tax contributions will be equal to the taxable value of the vehicle. This proposals purpose is to reduce the FBT to nil without impacting existing employee benefits. The proposed payment will only be made to employees who have been provided with a vehicle by the employer. Payments could include employees with novated lease vehicles. The net amount paid to each employee will be directed back to the employer as a post-tax contribution. The tax component of each payment will be determined by the employee's individual marginal tax rate. Tax will be paid to the Australian Taxation Office via the PAYGW system. Goods and services tax (GST) will be paid on post-tax contributions. Employees will be made aware that the payment is not a reward for services. Employee performance will have no bearing on the payment made and the payment will not be negotiable. Calculations will be done on an employee by employee basis. The amount payable will be calculated by reference to the vehicle driven, the age of the car, the value of the car and the number of kilometres travelled in the FBT year. The payments made by the employer will be voluntary; there will be no contractual or other entitlement to the payment. The employees are employed by the employer on individual contracts.

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

Reasons for decision: Detailed Reasoning - Question Two: Will an ex-gratia annual lump sum payment made by the entity to any of its employees who are provided with other benefits that are subject to fringe benefits tax (FBT) where the purpose of the lump sum is to reduce the FBT to nil be considered part of OTE as defined in subsection 6(1) of the SGAA? Answer: Yes, please see Reasons for decision. Note : This answer applies provided the Assumption listed under Question Two - reasoning remains valid. | Detailed Reasoning - This advice applies for the following period:: After 1 July 2011 | Detailed Reasoning - 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. The employer provides vehicles to employees for use in their employment. The employer is proposing to make annual lump sum payments to these employees. The payment will enable the employees to make post-tax contributions towards the running costs associated with the vehicles. The employer will use the post-tax contributions to reduce the taxable value of car fringe benefits to nil. The payment will be subject to pay as you go withholding (PAYGW). The employee's post-tax contributions will be equal to the taxable value of the vehicle. This proposals purpose is to reduce the FBT to nil without impacting existing employee benefits. The proposed payment will only be made to employees who have been provided with a vehicle by the employer. Payments could include employees with novated lease vehicles. The net amount paid to each employee will be directed back to the employer as a post-tax contribution. The tax component of each payment will be determined by the employee's individual marginal tax rate. Tax will be paid to the Australian Taxation Office via the PAYGW system. Goods and services tax (GST) will be paid on post-tax contributions. Employees will be made aware that the payment is not a reward for services. Employee performance will have no bearing on the payment made and the payment will not be negotiable. Calculations will be done on an employee by employee basis. The amount payable will be calculated by reference to the vehicle driven, the age of the car, the value of the car and the number of kilometres travelled in the FBT year. The payments made by the employer will be voluntary; there will be no contractual or other entitlement to the payment. The employees are employed by the employer on individual contracts. | Detailed Reasoning - Relevant legislative provisions: Superannuation Guarantee Administration Act 1992 6(1). | Detailed Reasoning - Reasons for decision: The SGAA places a requirement on all employers to provide a minimum level of superannuation support for their eligible employees by the quarterly due date, or pay the superannuation guarantee charge. The minimum level of support is calculated by multiplying the charge percentage (currently 9%) by each employee's earnings base. From 1 July 2008, an employer must use OTE as defined in subsection 6(1) of the SGAA as the earnings base to calculate the minimum superannuation contributions for their employees. This ensures that all employees are treated the same for superannuation purposes. | Detailed Reasoning - Definition of ordinary time earnings: OTE, in relation to an employee, is defined in subsection 6(1) of the SGAA and is the lesser of: · the total of the employee's earnings in respect of ordinary hours of work and earnings consisting of over award payments, shift loading or commission, but does not include lump sum payments made on the termination of employment in lieu of unused sick leave and unused annual leave; and · the maximum contribution base for the period. The Commissioner's views on OTE, as defined in the SGAA, are contained in Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2). SGR 2009/2 took effect from 1 July 2009 and represents the ATO view on OTE and salary and wages. Generally OTE are what employees earn for their ordinary hours of work, including commissions, paid leave and allowances. | Detailed Reasoning - Earnings in respect of ordinary hours of work: For a payment to constitute earnings in respect of ordinary hours of work the payment must be considered earnings of the employee and the earnings must be in respect of the employee's ordinary hours of work. An employee's earnings for the purposes of the definition of OTE in the SGAA is the remuneration paid to the employee as a reward for the employee's services. The practical effect for superannuation guarantee purposes is that the expression 'earnings' means 'salary or wages'. Paragraph 25 of SGR 2009/2 explains what is meant by the phrase 'in respect of ordinary hours of work'. 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 referrable to overtime hours or to other hours that are not ordinary hours of work. | Detailed Reasoning - Your Circumstances: As outlined in paragraph 25 of SGR 2009/2, all earnings in respect of employment are in respect of an 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. This position is further reiterated at paragraphs 225 to 228 of SGR 2009/2. Applying the general principles outlined above, it follows that the ex gratia annual lump sum payments made to employees, will be considered OTE, being earnings in respect of employment, unless they are: o remuneration for working overtime hours, or o otherwise referable only to overtime or to other hours that are not ordinary hours of work. The ex gratia annual lump sum payment proposed to be paid to employees who are provided with vehicles in the course of their employment is not associated with overtime hours worked by the employee or to other hours that are not ordinary hours of work. Although the annual lump sum payment is labelled an "ex gratia payment", and is indeed gratuitous in as much as the employer does not 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 the employees. The payment is not a personal gift unrelated to any work performed. The ex gratia annual lump sum payment is therefore 'salary or wages' and subsequently is earnings 'in respect of ordinary hours of work' and is OTE. | Detailed Reasoning - Conclusion: To constitute OTE under the SGAA, a payment must be earnings in respect of an employee's ordinary hours of work. Under paragraph 25 of SGR 2009/2, 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. | Detailed Reasoning - Assumption: That the other benefits provided by the employer are fringe benefits and that the lump sum payment relating to the other fringe benefits will have exactly the same characteristics as outlined in the Relevant Facts section above as applicable to the benefit. | Detailed Reasoning - Your Circumstances: As outlined in paragraph 25 of SGR 2009/2, all earnings in respect of employment are in respect of an 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. This position is further reiterated at paragraphs 225 to 229 of SGR 2009/2. Applying the general principles outlined above, it follows that the ex gratia annual lump sum payments made to employees, will be considered OTE, being earnings in respect of employment, unless they are: o remuneration for working overtime hours, or o otherwise referable only to overtime or to other hours that are not ordinary hours of work. The ex gratia annual lump sum payment proposed to be paid to employees who are provided with fringe benefits in the course of their employment is not associated with overtime hours worked by the employee or to other hours that are not ordinary hours of work. Although the annual lump sum payment is labelled an "ex gratia payment", and is indeed gratuitous in as much as the employer does not 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 the employees. The payment is not a personal gift unrelated to any work performed. The ex gratia annual lump sum payment is therefore 'salary or wages' and subsequently is earnings 'in respect of ordinary hours of work' and is OTE. | Detailed Reasoning - Conclusion: To constitute OTE under the SGAA, a payment must be earnings in respect of an employee's ordinary hours of work. Under paragraph 25 of SGR 2009/2, 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.

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