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HG Alert: Super Tax on Overtime - May 2009

New public ruling

The Australian Taxation Office has released a public ruling confirming that employers do not have to make compulsory superannuation contributions in respect of overtime payments.

The ATO accepts that it was never the intention of the law to require super contributions on overtime amounts. The controversy has been about the line between overtime earnings and other “non-overtime” earnings (called ordinary times earnings) which do require super contributions.

Whether the new ruling settles this controversy and provides clear guidance for employers is, of course, another question.

Background

The Superannuation Guarantee legislation requires employers to provide a minimum level of superannuation support for employees calculated by applying a contribution percentage (9%) to the employee’s ordinary times earnings. Prior to 1 July 2008 the percentage contribution rate was, in some cases, applied to amounts other than ordinary times earnings (such as an amount specified in award). However, employers must now use ordinary times earnings when calculating the required super guarantee contributions.

The ATO ruling (issued 13 May 2009) deals with the meaning of ordinary times earnings and salary and wages, for super guarantee purposes. The ruling (which runs 41 pages long) follows in the footsteps of the draft ruling issued in 2008 (45 pages). The new ruling overturns the Commissioner’s previous view that ordinary times earnings is determined by looking at the pattern of hours worked. This old view meant that regular overtime payments required super contributions, notwithstanding the policy that overtime should not be caught by the super guarantee rules. The Commissioner’s logic seemed to be that regular overtime could give rise to an implied variation of the employee’s standard working hours from those contained in a written agreement.

Practical implications

This change of heart is a good result for many employers. Ordinary times earnings (OTE) now means hours specified in an award or agreement. Work outside the span of those specified ordinary hours is not OTE and not subject to superannuation guarantee contributions. If ordinary times earnings are not specified in an award or written agreement they will be taken to be the ordinary, regular, customary or usual hours that an employee works.

The fine print

Hidden away in the ruling are a number of important statements. According to the ruling, the Commissioner expects payments for hours worked outside ordinary hours to be remunerated at a higher rate, and for there to be a “genuine” distinction between ordinary hours and other working hours. The Commissioner also seems to be saying that other payments that relate to overtime, such as commission, may in some cases not be subject to super guarantee obligations.

The ruling reinforces the importance of expert workplace relations advice when preparing or updating employment agreements. Employers should take particular care to ensure that all remuneration paid to employees is properly characterised (and documented) for superannuation guarantee purposes so that there are no unpleasant surprises when the Commissioner conducts his compliance audits.

For further information, please contact HopgoodGanim’s Industrial and Employment Law team.