Superannuation Guarantee Scheme: notional earnings base

Should an entity, an employer that has changed superannuation funds after 21 August 1991 but before 1995, apply an earnings base of ordinary times earnings (OTE) or the earnings base provided in the fund's trust deed which was in place pre-21 August 1991?

The entity, an employer that has changed superannuation funds after 21 August 1991 but before 1995, should apply an earnings base of the one provided in the fund's trust deed which was in place pre-21 August 1991.

From 1987 to 31 December 1993 the taxpayer was a member of superannuation fund A. His membership was transferred to superannuation fund B from 1 January 1994.

The taxpayer worked for Employer A from 1987 to 1992.

The taxpayer was employed by a related entity of Employer A (Employer B) from 1992 to 1999.

After that period, due to a company takeover, he became an employee of Employer C.

During his employment with Employer B, the employee was paid a number of bonuses as part of an incentive scheme. No superannuation contributions were made with respect to these bonus payments.

Throughout the employee's membership of superannuation fund B, the superannuation fund's trust deed provided that that an employee's earnings base was OTE, which excluded bonus payments.

'Earnings base' is one of the key concepts under the Superannuation Guarantee (Administration) Act 1992 (SGAA). The SGAA imposes a tax on employers who do not make the minium level of superannuation contributions of each employee. That minimum level is calculated as a percentage of each employee's earnings base.

The term 'notional earnings base' is defined by sections 13, 13A, 13B and 14 of the SGAA, depending on the employer's circumstances. Section 13 of the SGAA applies to determine the notional earnings base in relation to a current employee if the employer was contributing to the same fund under the same 'applicable authority' for the benefit of the employee prior to 21 August 1991.

Sections 13A and 13B apply to specific superannuation funds (the Seafarers' Retirement Fund and the Aberfoyle Award Superannuation Fund) and are not relevant in this case. Section 14 of the SGAA applies to determine the notional earnings base where sections 13, 13A and 13B of the SGAA do not apply. For example, section 14 would apply where an employer first contributed to a superannuation fund under an award, arrangement, law or scheme for the benefit of an employee on or after 21 August 1991, or was contributing before that date but the notional earnings base was reduced on or after that date. Earnings bases which can be used for purposes of the SGAA are outlined in Superannuation Guarantee Ruling SGR 94/1.

The facts of the case fall within section 13 of the SGAA and not sections 13A, 13B or 14 of the SGAA. This is the employer's pre-21 August 1991 earnings base and the contributions that have been made on this basis continuously since that time ensure that the default definition of OTE is not applicable to the employer's employees. Section 13 of the SGAA allows a lower notional earnings base to be used where specific conditions have been satisfied.

The trust deed of the superannuation fund provides that the earnings base is effectively a variation of OTE which does not include either a bonus or commission payment. The default OTE option, as outlined in SGR 94/4, includes both these types of payment.

The employer uses the trust deed definition when determining the employee's earnings bases, and consequently does not make superannuation payments for bonuses paid. The reason for using this earnings base was predicated on the claim that, since the employer has made contributions for 30 years according to this definition, the facts of the case fall within section 13 of the SGAA and not section 14 of the SGAA. This employer's pre-21 August 1991 earnings base and the contributions that have been made on this basis continuously since that time ensure that the default definition of OTE is not applicable to its employees. As previously stated, section 13 of the SGAA allows a lower notional earnings base which can be applied in these circumstances.

However section 13 of the SGAA was amended in 1995. Arguably, the 1995 amendment allows a lower notional earnings base to be maintained after 21 August 1991, even in a situation where there has been a change of employer and superannuation fund after 28 June 1994, provided the employee's superannuation benefits remained the same as at the previous fund or employee.

The argument continues that where there has been a change of employer or fund between 21 August 1991 and June 1994 then the employer would be required to determine an employee's notional earnings base according to section 14 of the SGAA. In this situation there was a change of employer in 1992 and the change of funds in 1994.

However, in view of the dates in the facts of this case, the 1995 amendments are not relevant. The employee's employment and original fund were changed in 1992 and 1994 respectively. This predates the introduction of the amending legislation, which is effective for contributions made from 1 July 1995. Therefore, section 13 as originally enacted must be considered when applying the law to the facts of this case.

The original section 13 of the SGAA also dealt with the meaning of the employee's notional earnings base. The application it gave to the operation of a pre-21 August1991 notional earnings base was narrower in operation than that which is currently applicable. The section held that a pre-21 August 1991 notional earnings base applied in the following situations: (a) where the employer is contributing to the fund in accordance with an industrial award or an occupational superannuation arrangement for the benefit of the employee in relation to a contribution period and: (i) was so contributing immediately before 21 August 1991; or (ii) was contributing to the fund in accordance with that award or arrangement (as the case may be) for the benefit of another employee immediately before 21 August 1991; (ab) where the employer is contributing to the fund in accordance with a law of the Commonwealth, a State or a Territory for the benefit of the employee in relation to a contribution period and: (i) was so contributing immediately before 21 August 1991; or (ii) was contributing to the fund in accordance with the law in question for the benefit of another employee immediately before 21 August 1991; (b) where the employer is otherwise contributing to the fund under the applicable superannuation scheme for the benefit of the employee in relation to a contribution period and: (i) was so contributing immediately before 21 August 1991; or (ii) was contributing to the fund under the applicable superannuation scheme for the benefit of another employee immediately before 21 August 1991.

The operative provision at the time of the transfer of employment and funds by the taxpayer is paragraph 13(1)(b) of the SGAA.

As the employer was contributing superannuation for its employees, according to the applicable superannuation scheme, to superannuation fund B immediately before 21 August 1991, the matter falls within the ambit of section 13 of the SGAA for determination of the earnings base.

Section 13 still applies, because of the impact of subparagraph 13(1)(b)(ii) of the SGAA, even where no contributions are made for the specific individual concerned prior to 1991. The section requires that a contribution be made to the same superannuation fund for another employee immediately before 21 August 1991 in the circumstances required. As such, if the employer had made contributions to this same fund under the relevant scheme immediately before 1991 for another of their employees and this situation had continued unchanged to the present then section 13 of the SGAA would still continue to apply. This is in spite of the fact that the employee was required to change funds in 1994.

Given the employer has continued to make their contributions throughout this period under the same trust deed as they did before 1991, then section 13 of the SGAA will be applicable, the pre-21 August 1991 earnings base will be relevant and the narrow definition of OTE contained in the scheme's trust deed will determine the employee's earnings base. The employee will therefore not be entitled to extra superannuation contributions for the commissions and bonuses he has earned during his employment with Employer B. The employer should apply an earnings base of the one provided in the fund's trust deed which was in place pre 1991. Note: As at 1 July 2008 the earnings base will be redundant. Changes made to the SGAA will ensure that 'ordinary time earnings' is the standardised earnings base for all employees for the purposes of the SGAA. This will be achieved by removing the grandfathered earnings base provisions currently in the Act.