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Edited version of administratively binding advice
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Ruling
Subject: Profit share payments received by employees
Question
Are profit sharing payments considered ordinary time earnings (OTE) for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?
Advice
Yes, profit sharing payments are considered to be included in OTE for the purposes of the SGAA.
This advice applies for the following period:
1 March 2010 - 28 February 2012
The arrangement commences on:
28 February 2011
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.
In February 2011 your board of directors exercised their discretion to pay a share of the profit to staff.
You provided the following information:
All employees in three Bands are eligible for this payment.
· Any employees who have moved from the top band eligible for the payment to the next Band in the structure during the profit period should receive the payment as a percentage of their basic salary for the number of days they were in the lower Band role.
· The payment is calculated as a percentage of the employee's basic salary.
· To be eligible for the payment the employee has to have been employed during the profit period.
· Anyone who joined mid-way through this period should have their payment pro-rated to the day.
· Employees who have had a period of long-term sickness absence within the profit period should have the percentage based on their pre-disability salary with no pro-rating needed.
· Employees who have had a period of maternity leave within the profit period should have the percentage based on their basic salary at the end of the profit period.
Relevant legislative provisions
Superannuation Guarantee (Administration) Act 1992 6(1).
Reasons for decision
Summary
Whilst the profit share payment is only paid to employees at the discretion of the board of directors, it is considered that there is a causal connection between the decision to exercise the discretion and the employees' ordinary hours of work.
Therefore you are liable for superannuation guarantee obligations in respect of the profit share payment paid to your employees.
Detailed reasoning
The Superannuation Laws Amendment (2004 Measures No 2) Act 2004 simplifies the earnings base of an employee for Superannuation Guarantee (Administration) Act 1992 (SGAA) purposes. The amendments which apply from 1 July 2008 have the effect that all employers will calculate their SGAA liability against an employee's ordinary time earnings (OTE), as defined in the SGAA.
Consequently, some employers will have to contribute on an earnings base that includes additional items, such as bonuses, commissions and shift loading, which may not have been included in the earnings base that some employers were using prior to 1 July 2008.
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 an employee's 'ordinary hours of work' are the hours specified as ordinary hours of work under the relevant award or agreement that governs the employee's conditions of employment and highlights that any hours worked in excess of, or outside the span those specified ordinary hours of work are not part of the employee's 'ordinary 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:
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.
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'.
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 profit share payment is only paid to employees at the discretion of the board of directors, it is considered that there is a causal connection between the decision to exercise the discretion and the employees' ordinary hours of work.
This causal link arises from the fact that the employees were only eligible for the 'air share' payment if they had been employed during the profit period and that the payment was calculated as a set percentage of their salary.
A further indication that this payment is related to the employees' ordinary hours of work is evidenced by the fact that it is described as a profit share, and the generation of the organisation's profit is in part generated by the ordinary hours of work that are worked by each employee.
Therefore you are liable for superannuation guarantee obligations in respect of the profit share payment paid to your employees.
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