 |
Superannuation Guarantee The Tax Office has released Draft Superannuation Guarantee Ruling SGR 2008/D2 in which it explains the Commissioner’s preliminary view on what constitutes ‘ordinary time earnings’ (OTE) as defined in subsection 6(1) of Superannuation Guarantee (Administration) Act 1992 (the SGA Act). The Draft also explains the meaning of ‘salary or wages’ as defined in section 11 of the SGA Act. The Draft proposes that when the Ruling is finalised it will replace Superannuation Guarantee Rulings SGR 94/4 and SGR 94/5, which currently states the Commissioner’s views on OTE and salary or wages. Background From 1 July 2008, employers must use OTE when calculating the prescribed minimum superannuation guarantee contributions required for their employees. If employers provide less than the required minimum level of contributions, they will be liable to pay a non-deductible superannuation guarantee charge which is calculated using salary or wages. The Draft states that payments included in OTE are also included in salary or wages. It also states that payments specifically excluded from OTE are not necessarily excluded from salary or wages. In other words, ‘salary or wages’ as defined in section 11 has a broader concept than OTE. Ordinary time earnings The term OTE is defined in subsection 6(1) of the SGA Act. It prescribes a requirement that earnings be in respect of ordinary hours of work. However, the terms ‘earnings’ or ‘ordinary hours of work’ are not specifically defined in the SGA Act. Therefore, the Draft states that the terms take their ordinary meanings within the context of the Act. According to the Draft, the word ‘earnings’ refers to the remuneration paid to an employee, as a reward for the services of the employee. It states that an employee’s ordinary hours of work are the usual hours of work that the employee works. It also states that where an offer of employment specifies only the minimum hours of work, it is the actual hours worked plus any hours of paid leave that is considered the ordinary hours of work. It further states that if the employee has entered into an award or industrial agreement and:
The Draft notes that ‘ordinary hours of work’ are not limited to hours between 9am to 5pm, Monday to Friday but could include night and weekend shifts. It also notes that the OTE of an employee cannot exceed the maximum contribution base for a quarter. The Draft says that two elements must be satisfied for a payment to be considered ‘earnings in respect of ordinary hours of work’. Firstly, the payment must constitute the earnings of an employee in relation to a particular quarter of an income year. The Draft says that it is the economic substance rather than the legal label affixed to the payment which characterises the payment. Secondly, the earning must be in respect of the employee’s ordinary hours of work. The Draft notes that where a payment is wholly unconnected or incidental to the services of the employee, the payment is not OTE. The Commissioner provides his view on whether certain payments receive by employees is OTE. These payments include
Salary or wages It is the Commissioner’s view that the salary or wages of an employee can be paid by the employer or by another party on behalf of the employer. He states that salary or wages are not restricted to cash or cash equivalent payments but can include payments made in-kind to the employee. He also states that a payment is included in salary or wages if the employee has the entitlement to receive the money for himself or herself. The Draft states that whether a payment constitutes ‘salary or wages’ is to be determined in the circumstances of each case, having regard to relevant case law. It also states that the meaning of ‘salary or wages’ requires an employment relationship to exist. It further states that a nexus between the provision of services by an employee and payments received by the employee needs to be present. The Draft examines whether certain payments received by an employee constitute salary or wages. These include
Examples The appendix accompanying the Draft contains a table summarising whether common payments received by employees are considered to be OTE and/or salary or wages. It also contains 24 examples setting out common scenarios which employers may encounter. The table below, which is adapted from the Draft, provides a general guide the treatment of common payments.
When finalised, the Ruling will apply from 1 July 2009. It is important to note the Ruling will not apply retrospectively, which means that employers will need to rely on the Commissioner’s current views on OTE and salary or wages stated in Superannuation Guarantee Rulings SGR 94/4 and 94/5. Discussion of Draft While the Commissioner’s view of whether a payment is taken into account for OTE or salary or wages has not significantly departed from his current view, his view relating to certain payments appears to have changed. In SGR 94/4 and 94/5, the Commissioner considered that annual leave loading, maternity leave and jury duty leave payments are not included in OTE. He also considered Christmas bonuses to be part of salary or wages. However, the Draft now appears to convey a different view — see table above. It is important to note that the Draft does not distinguish between the different types of leave payments. Rather, it says that ‘all leave payments are considered OTE’. It also says that ‘all leave payments are directly related to services provided as an employee and are considered salary or wages’. On 3 September 2008, the Tax Office released Draft Superannuation Guarantee Ruling SGR 2008/D1 in which the Commissioner stated his preliminary view on whether a payer is required to remit superannuation guarantee for payments paid to sportspersons and persons providing services in connection with sporting activities. In particular, this Draft Ruling discusses whether prize monies and other payments made to sportspersons are ‘salary or wages’ under subsection 11(1)(d) of the SGA Act and are ‘ordinary time earnings’ for the purpose of subsection 6(1) of the SGA Act. Legal status of Superannuation Guarantee Ruling A Superannuation Guarantee (SG) Ruling, whether draft or final, represents the Commissioner’s views about the operation of the superannuation guarantee legislation and related regulations. An SG Ruling is not legally binding on the Commissioner. However, if the Commissioner later takes the view that the law applies less favourably to a taxpayer than the Ruling, the fact that the taxpayer acted in accordance with the Ruling would be a relevant factor in the Commissioner exercising his discretion as to what action to take in response to the breach of that law. SMSFs and In-house Assets The Tax Office has released Draft Self Managed Superannuation Fund Ruling SMSFR 2008/D5 in which it explains the core concepts in the definition of ‘in-house asset’ in section 71 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) as they apply to self-managed superannuation funds (SMSFs). The key definitions explained are
Basic definition of ‘in-house asset’ An ‘in-house asset’ is defined in subsection 71(1) of the SIS Act as: ‘an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund &’ This part of the definition contains several terms which are defined in the SIS Act and require further consideration. Asset An ‘asset’ means ‘any form of property’ and includes money whether Australian currency or foreign currency: subsection 10(1) of the SIS Act. The Commissioner considers that the phrase ‘any form of property’ has a very wide meaning and includes every type of right, interest or thing of value that is legally capable of ownership. It encompasses real property and personal property and includes any right or interest (including legal, equitable or statutory) that is of value and legally capable of ownership. While assignability generally is a characteristic of a proprietary right, the Tax Office says it is not in all cases an essential characteristic. Loan A ‘loan’ includes the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings: subsection 10(1). The Draft states that the term ‘loan’ in subsection 10(1) extends to include arrangements that are in substance, financing arrangements deferring the payment of an amount. Such arrangements would include, but are not limited to, the loan of money, sale of goods or land on credit, instalment payment arrangements and arrangements for the deferral of payment of debts or entitlements. However, the Commissioner states that not every situation where a payment is deferred necessarily amounts to a ‘loan’ under the extended definition. The Tax Office also accepts that payment of goods on normal commercial terms will not amount to a ‘loan’, nor will late payments which were not agreed to by the trustee of the superannuation fund. In addition, it is the Commissioner’s view that ‘loan’ also encompasses arrangements where there is no objective purpose of gaining interest, income, profit or gain, e.g. an interest free loan. It therefore covers arrangements that may not be an ‘investment’ under subsection 71(1). Meaning of ‘investment in’ While the term ‘investment’ is not defined in the SIS Act, the term ‘invest’ is defined to in subsection 10(1) to mean:
In this context, the Tax Office says the corresponding meaning of the term ‘investment’ is the asset resulting from applying the assets of an SMSF or entering into a contract for the purpose of gaining interest, income, profit or gain. Having identified that an asset of an SMSF is properly classified as an investment, the Commissioner says it is then necessary to determine whether that investment is ‘in’ a related party or a related trust. Whether an investment is ‘in’ a particular entity is determined by reference to the legal rights acquired by the SMSF in return for its expenditure. It is the Commissioner’s view that where money or assets are provided for, the benefit of a related party or related trust for the purpose of receiving income, interest, profit or gain, a sufficiently close connection will be established between the investment and that entity to enable it to be described as an investment ‘in’ that entity. The Tax Office notes that it is the reliance on the related party or the related trust for payment on the investment which will be determinative, as this is what gives rise to the financial risk that the in-house assets rules in Part 8 of the SIS Act are designed to reduce. Leases The term ‘lease’ is not defined in the SIS Act and therefore is given its ordinary meaning. In respect of real property, the Draft Ruling states that a lease is a ‘demise’ that grants a leasehold estate in the property to the lessee for a term. That is, the lessee has an interest in the land (a chattel real). This can be contrasted with a licence to enter land, which does not confer any interest in the real property. Of particular importance to determining whether an agreement amounts to a lease or a licence agreement, is whether exclusive possession is granted to the property. That is, the tenant has not only the right to occupy the premises, but to exclude access to all others, including the legal owner of the land. Therefore, the Commissioner considers that a lease in respect of real property will occur where the lessee is granted exclusive possession of the property, generally in exchange for a rent. The Tax Office says that a key difference between a lease of real property and a lease of chattels (non-real property) is that no proprietary interest in the asset is created in respect of a chattel lease. However, the right of possession granted to the hirer under the agreement, although not referred to as ‘exclusive possession’, nonetheless includes the right to debar the legal owner from resuming possession. It is therefore the Commissioner’s view that the term ‘lease’ in subsection 71(1) in respect of non-real property means a legally enforceable hiring agreement involving the payment of consideration by the hirer in exchange for enforceable temporary possession of the asset. Lease arrangements It is the Commissioner’s view that the term ‘lease arrangement’ (defined in subsection 10(1)) expands the definition of in-house assets to include informal arrangements under which a person uses or controls the use of fund property. This includes arrangements where a related party gains possession of an asset of the superannuation fund, even where no rent is payable in exchange for that possession. Where an SMSF trustee enters into a lease or lease arrangement with a related party in respect to part of some property, the Tax Office says the in-house asset is the part of the property that is leased to the related party. Where an asset is leased or subject to a lease arrangement for part of the year, the Draft Ruling states that the full value is an in-house asset for the period that it is leased or subject to a lease arrangement with a related party. Examples The Draft Ruling includes Examples illustrating how section 71 of the SIS Act applies in given fact situations, such as:
Importantly, the Draft warns that it does not provide the Commissioner’s views on how other the SIS Act and the SIS Regulations provisions apply to any of the arrangements discussed in the Draft. Date of effect When finalised, the Ruling will apply to SMSFs and former SMSFs both before and after its date of issue. In-house assets rules Broadly, the in-house assets rules, which are contained in Part 8 of the SIS Act, prevent a regulated superannuation fund (including an SMSF) from having more than 5% of the total market value of its invested in in-house assets at the end of an income year. An in-house asset is defined in section 71 of the SIS Act to include (unless an exception applies):
The definition of an in-house asset relies on the core concepts which are discussed in the Draft Ruling. Therefore, it is of paramount importance for a trustee of an SMSF to understand these concepts to ensure that the SMSF does not breach the in-house assets rules. Section 84 of the SIS Act prescribes that every trustee of an SMSF must take all reasonable steps to ensure compliance with the rules. A contravention of the rules is a civil penalty which may result in civil and criminal consequences. Legal status of SMSF Ruling An SMSF Ruling, whether draft or final, represents the Commissioner’s views about the way in which provisions of the SIS Act, or regulations under that Act, apply to SMSFs. An SMSF Ruling is not legally binding on the Commissioner. However, if the Commissioner later takes the view that the law applies less favourably to a taxpayer than the Ruling, the fact that the taxpayer acted in accordance with the Ruling would be a relevant factor in the Commissioner exercising his discretion as to what action to take in response to the breach of that law. Trustee of SMSF Charged In a media release from ASIC, the corporate regulator said that a trustee of a self-managed superannuation fund (SMSF) has been charged under sections 62 and 202 of Superannuation Industry (Supervision) Act 1993 (the SIS Act). The proceedings were brought against the trustee following an investigation conducted with the assistance of the Tax Office. ASIC alleged that the preserved superannuation benefits of 121 superannuants, totalling over $3.5 million, were deposited into the bank accounts of the SMSF. These funds were rolled over from 11 complying superannuation funds. The trustee then allegedly used the fund to unlawfully obtain early access to these benefits by withdrawing and distributing the funds to the superannuants. The trustee also retained over $685,000 for himself by way of a commission. ASIC also alleges that the trustee was aware he had an obligation to preserve the superannuants’ benefits until the superannuants had satisfied a condition of release but had no intention of doing so. SIS Act requirements Section 62 of the SIS Act requires each trustee of a regulated superannuation fund (including an SMSF) maintains the fund solely for at least one core purpose, or at least one core purpose and one ancillary purpose. A trustee who maintains the fund only for one or more ancillary purposes will contravene the test. Essentially, the core purposes are the provision of benefits:
Ancillary purposes are those that a fund may maintain in conjunction with at least one of the core purposes. These purposes are as follows:
|