Prushka Fast Debt Recovery Pty Ltd and Commissioner of Taxation
[2008] AATA 762
•28 August 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 762
ADMINISTRATIVE APPEALS TRIBUNAL )
) No VT200600274
TAXATION APPEALS DIVISION ) No VT200600275 Re PRUSHKA FAST DEBT RECOVERY PTY LTD Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr Egon Fice, Member Date28 August 2008
PlaceMelbourne
Decision The Tribunal affirms the decisions under review. (sgd) Egon Fice
Member
superannuation guarantee shortfall – bonus payments – minimum guarantee contribution – notional earnings base – ordinary times earnings – ex gratia payments – legal obligation to pay bonus – representation to employees – discretion not to pay bonus – salary and wages
Acts Interpretation Act 1901
Superannuation Guarantee (Administration) Act 1992
Superannuation Guarantee Act 1992
Quest Personnel Temping Pty Ltd v Commission of Taxation [2002] FCA 85
Murdoch v The Commissioner of Pay-roll Tax (Vic) (1980) 143 CLR 629
Hatfield v Health Insurance Commission (1986) 15 FCR 487
Smith v Commissioner of Taxation of the Commonwealth of Australia (1987) 164 CLR 513
Technical Products Pty Ltd v State Government Insurance Office (Qld) (1989) 167 CLR 45
Social Credit Savings and Loans Society Limited v Federal Commissioner of Taxation (1971) 125 CLR 560
REASONS FOR DECISION
28 August 2008 Mr Egon Fice, Member 1. In July 2002, following completion of a Superannuation Guarantee Audit, the Commissioner of Taxation (the Commissioner), determined that Prushka Fast Debt Recovery Pty Ltd (Prushka) had not satisfied its obligations under the Superannuation Guarantee (Administration) Act 1992 (SGA Act) for the financial years ended 30 June 2000 and 30 June 2001. According to the Commissioner, Prushka had a shortfall of $8,783.32 for the year 2000 and $30,551.99 for the year 2001.
2. In June 2004 Prushka’s accountants lodged with the Commissioner an objection against the assessment of a superannuation guarantee charge for the relevant years. Although the objection was lodged out of time, the Commissioner allowed the objection and treated it as having been lodged on time.
3. On 17 July 2006 the Commissioner issued an objection decision in which he disallowed Prushka’s objections to both years in question in full. Prushka seeks a review of the Commissioner’s decision to levy a superannuation guarantee charge in respect of both years.
4. The only issue before me is whether bonus payments made to certain employees by Prushka in the relevant years must be taken into account in calculating its minimum superannuation guarantee contributions and/or the superannuation guarantee charge.
RELEVANT BACKGROUND
5. During the relevant years Prushka was a company which carried on a debt recovery business as a mercantile agent. Its staff were divided into three divisions:
(a)sales (or client services) staff (5 employees);
(b)branches staff (12 employees); and
(c)Mitcham staff (comprising 11 administration employees and 43 collections staff in 2000, and 73 in 2001).
6. Mr Roger Mendelson, the founder and Chief Executive Officer of Prushka, set the wages of Prushka’s staff by reference to the Clerical and Administrative Employees (Victoria) Award 1999. According to Mr Mendelson, he set wage rates above the award rate.
7. As an incentive to staff, Mr Mendelson established a profit-share bonus scheme in the early 1990s under which staff could share in profits generated by Prushka. The initial profit share scheme consisted of incentive bonus payments to individual collections staff based at Mitcham, dependent upon individual work performance. Mr Mendelson said this scheme was counter-productive because of the discrepancies which could arise due to individual circumstances. He therefore altered the scheme so that it covered all employees at Mitcham but it did not apply to sales staff or branches staff. Minimum recovery targets were established for collections staff and the achievement of those targets was a pre-condition to entitlement to share in a bonus pool. Underperforming staff did not become eligible for the bonus payment. Non-collection staff were eligible to share in the bonus profit pool as long as their work attendances were satisfactory. Prushka established a bonus pool of funds only when it had sufficient surplus from profits generated in any particular month. According to Mr Mendelson, bonus payments were made on an ex gratia basis out of a fixed profit pool. Payment was entirely discretionary. Staff members were excluded if they had been subjected to disciplinary action or where they did not meet established performance targets.
8. Discrete bonus systems were developed for branches staff and the sales team. The branches’ bonus was based on individual performances and the sales team bonus on team performance. Prushka admitted the superannuation shortfall in respect of these payments.
9. In the late 1990s, to assist in the management of Prushka’s operations, Mr Mendelson drafted what became known as the Prushka Manual. A copy was given to each staff member upon engagement. In late 2002 and early 2003 Mr Mendelson redrafted Part 25 of the Prushka Manual to, as he put it: better explain the profit share bonus scheme.
10. On 21 August 2001 Prushka received notification of a Superannuation Guarantee Audit for the period of 1 July 1999 to 30 June 2001. As a result of that audit, the Commissioner issued amended assessments under the SGA Act indicating superannuation guarantee shortfalls for the 2000 and 2001 years.
THE LEGISLATIVE SCHEME
11. The Explanatory Memorandum to the Superannuation Guarantee (Administration) Bill 1992 and the Superannuation Guarantee Charge Bill 1992 indicate that the purpose of the bills was to encourage employers to provide a minimum level of superannuation support for employees. Where the employer provides superannuation support for employees below a minimum level, a tax is imposed on the employer by way of a superannuation guarantee charge equivalent to the shortfall (Superannuation Guarantee Charge Act 1992 s 5). The shortfall is the difference between the minimum level an employer was required to provide and the level which the employer in fact provided to each employee.
12. The minimum level of employer superannuation support is set out in s 20 of the SGA Act. It was set at seven per cent for the financial year ended 2000, and eight per cent for the financial year ended 2001.
13. An employer’s percentage superannuation guarantee contribution is applied to an employee’s notional earnings base. The relevant notional earnings base in the case of Prushka employees is that set out in s 14 of the SGA Act. In so far as it may be relevant, s 14 of the SGA Act provides:
14 Interpretation: notional earnings base where superannuation contributions not made for the benefit of certain employees immediately before 21 August 1991
(1)Subject to subsection (1A), this section deals with the meaning of the expression notional earnings base in relation to an employee who is a member of a superannuation fund, or the holder of an RSA, to which an employer is contributing, for the benefit of the employee, in the following situations:
(a)where the employer is contributing to the fund or the RSA in accordance with an industrial award or an occupational superannuation arrangement for the benefit of the employee in relation to a quarter;
(ab)where the employer is contributing to the fund or the RSA in accordance with a law of the Commonwealth, a State or a Territory for the benefit of the employee in relation to a quarter;
(b)where the employer is otherwise contributing to the fund or the RSA under the applicable superannuation scheme for the benefit of the employee in relation to a quarter.
…
(2)Subject to subsections (2A), (2B), (3) and (4), the expression notional earnings base means the earnings of the employee that, under the award, arrangement, law or scheme as in force on:
(a) the first day of a quarter; or
(b) the first day of employment; or
(c)the day on which the employer begins to contribute to the fund or the RSA;
whichever is the later, constitute the employee’s earnings by reference to which the requisite employer contribution is to be calculated.
(3)If, in a case where the employer is contributing to the fund or the RSA in accordance with an occupational superannuation arrangement, a law of a kind referred to in paragraph (1)(ab) or the applicable superannuation scheme, the employee’s notional earnings base calculated in accordance with subsection (2) would, in relation to a quarter, be less than the employee’s ordinary time earnings for the quarter, the employee’s notional earnings base is the employee’s ordinary time earnings.
(4)If an employee’s notional earnings base ascertained in accordance with subsection (2) in relation to a quarter would be an amount greater than the maximum contribution base for that quarter, the employee’s notional earnings base is the maximum contribution base.
…
Sub-paragraph (4) does not apply to this matter because the maximum contribution was greater than the notional earnings base.
14. Ordinary time earnings is defined in s 6 of the SGA Act as follows:
ordinary time earnings, in relation to an employee, means:
(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)an unused annual leave payment, or unused long service leave payment, within the meaning of the Income Tax Assessment Act 1997; and
(ii)earnings consisting of over-award payments, 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.
15. We are not concerned here with any lump sum termination payments and therefore the focus is on earnings in respect of ordinary hours of work, including over-award payments, shift loading and commissions.
16. The superannuation guarantee shortfall is defined in s 17 of the SGA Act. It includes the total of the employer’s individual superannuation guarantee shortfalls for the year; the employer’s nominal interest component for the year; and the employer’s administration component for the year. The shortfall is calculated by applying to an employee’s salary and wages, the charge percentage for the employer for the quarter. The actual employer support reduces the charge percentage in accordance with s 23 of the SGA Act.
PAYMENTS IN DISPUTE
17. The dispute essentially involves the proper application of the SGA Act, and in particular the meaning of ordinary times earnings, to payments made by Prushka to employees under its Profit Share Bonus Scheme. According to Mr A Broadfoot of counsel, who appeared on behalf of Prushka, the evidence establishes that the bonuses were ex gratia payments which were only made in any given month if the business as a whole reached specified revenue targets. Bonuses were not payable in respect of hours worked or the nature of the services performed by employees.
18. On the other hand, Ms M Wall of counsel, who appeared on behalf of the Commissioner, submitted that the bonus payments did fall within the definition of ordinary times earnings on the basis that they were paid in respect of ordinary hours of work, including over-award payments and commissions. They were not free gifts.
THE NATURE OF THE BONUS SCHEME
19. Mr Mendelson’s evidence was that Prushka runs its debt collection business on the basis of no recovery, no charge. It therefore set targets for a number of its Departments, particularly sales staff and collections staff based at Mitcham and also out in the branches. The collections are recorded on a daily basis. The records so obtained not only assist Prushka in assessing an individual employee’s performance but they are also used to determine eligibility in the profit share bonus scheme. Mr Mendelson said an initial profit sharing scheme was set up in the early 1990s and it involved paying individuals relatively small monthly payments out of profits derived by Prushka from its debt collection business. According to Mr Mendelson, he gave little thought to the description which he applied to those payments. He simply called them bonuses for ease of use.
20. As Prushka grew from a small business to something more substantial, Mr Mendelson developed the profit share bonus scheme such that it covered all employees based in the Mitcham office including administrative and support staff but did not include sales staff and branches staff, who had discrete bonus schemes. According to Mr Mendelson, staff did not have an entitlement to share in the profit‑share bonus, because Prushka at all times retained the right not to pay any money from profit in any particular month. The profit-share bonus was calculated from a fixed pool of profit and split between the staff. Mr Mendelson determined the amount of the pool in any month. Provided that the collection staff as a group reached the minimum profit share pre-condition, Mr Mendelson would allocate sums from the profits to be paid to those staff included in the pool. Mr Mendelson made it a practice not to allow employees to share in a bonus pool, if it was available, where they were subject to any disciplinary action. According to Mr Mendelson, even if Mitcham collection staff members reached the required collections target to be eligible for the profit pool, they could nevertheless be excluded by management without reason. Non-collection staff members at Mitcham were not treated any differently.
21. Mr Mendelson said that the profit-sharing bonus scheme was arranged so as not to impose a legal liability on Prushka to make the payment and it did not form part of the employment contract with its staff.
22. In the late 1990s, according to Mr Mendelson, he decided he needed to document the procedures for Prushka, including the way in which salaries were packaged. The details were recorded in the Prushka Manual. A copy of the Prushka Manual was given to each staff member after they were hired. In the Prushka Manual for 1999/2000, is a section headed PRUSHKA 1999/2000 SALARY PACKAGE FOR MELBOURNE OFFICE. That document sets out the rates of salary for the three levels of employees at Mitcham. In addition, it contains a section which is headed CHANGED BONUS SCHEME. As well as setting out some changes to the bonus scheme due to additional staff, the document sets out the daily revenue and the proportion of that revenue which would fall into the bonus pool on a daily basis. It also calculated the daily average debt recovery required to be achieved by each account controller in order to satisfy the bonus revenue requirements. At paragraph 15, it is stated:
15. You will note from the table that as long as each Account Controller achieves the minimum daily figure and the three Field Collectors achieve target and allowing for the three Team Leaders to reach 50 per cent of the target, our bench mark daily average should now be $11,100 and this will result in a bonus pool of $10,000.
23. The Prushka Manual also stated that the rules would be changed for the following 12 months so that a bonus would only be paid if a team member achieved the minimum figure for the month and there was to be no carry-over from the previous month. It also stated that members of the administration team will get a bonus based on the number of days worked in the month.
24. The Prushka Manual was again amended for the 2000/2001 year and in the introductory paragraph, it is said:
1. The current salary system is based on the principles established in 1995, when the existing bonus scheme was established.
25. The 2000/2001 Manual also noted additional categories of members and the fact that the top tier of members would qualify for an additional one off annual payment. Under the section dealing with the additional one off annual payment, it was said:
Management reserves the right to disqualify a person from the additional bonus in the event where their behaviour is not consistent with the expectations for a person at the level of Team Member ++.
26. The terms of the bonus were set out such to indicate different entitlements to the bonus scheme by different categories of employees. The manual also stated:
Management reserves the right not to pay a bonus in the event where a particular person has faced disciplinary issues or has had extended leave without pay.
27. The 1999 Prushka Manual, which set out the Mitcham team bonus details in Part 25, was also in evidence. Under Part 25.6, the manual stated that management must reserve the rights at all times to make variations to the bonus scheme.
28. It was not until the Prushka Manual was redrafted in late 2002 or early 2003, that Part 25, dealing with the Mitcham team bonus, stated the following:
Payment of the bonus is an ex gratia payment at the discretion of management. Accordingly, management reserves the right to exclude any person in any month without assigning any reason.
This is the first time that the expression ex gratia payment appears in a document relating to the bonus scheme.
29. According to Mr Mendelson’s statement of evidence, the amendment to Part 25 in late 2002 or early 2003 was made to reflect the oral instructions he gave senior management in the late 1990s. Although Mr Mendelson maintained the bonus was an ex gratia payment in the sense that it was a free gift, he also said, in cross‑examination, it was not a gift in a commercial sense. I understood that to mean it was not a gift as one would understand in a commercial setting. Mr Mendelson maintained that Mitcham employees had no legal entitlement to a bonus scheme payment because it was entirely discretionary. This was despite the fact he agreed that employees had come to expect the payment as part of their salary package. Mr Mendelson agreed that what generally happened was, if the target figures were reached, bonus payments were made. Mr Mendelson agreed that the only times he exercised the discretion not to make a payment was if there was misconduct by the employee. Mr Mendelson also said in his written evidence that there were numerous instances where individuals at Mitcham did not meet the minimum daily commission figures to be considered for the bonus. However, in the exercise of his discretion, he granted the individual a share of the profit as an expression of thanks for their hard work.
30. A copy of an account controller’s job description was also in evidence. As far as salary is concerned, in addition to setting out the base weekly salary, the job description stated:
After one month’s trial, the applicant will join the Team Bonus. To qualify each month, it is necessary to reach the minimum revenue target set. For the last six months, the bonuses for some one qualifying each month have been at the rate of $1,200 per month. As an indication, over 12 months, the bonuses would be expected to exceed $7,000.
There is nothing in the job description which so much as suggests that the payment of a bonus was discretionary.
31. Ms Sheila Brown, who was formerly employed by Prushka as a consultant, gave evidence in support of Mr Mendelson’s claim. Ms Brown said in the mid-to-late 1990s, she conducted prospective employee interviews with Mr Mendelson. She said that in the course of those interviews, she explained Prushka’s bonus system and it was made clear to each applicant that the bonus system was not part of the employee’s salary; that it was completely at the discretion of management; and that the employee should not rely on it being paid. This was despite the fact that all of the relevant documents put into evidence for the 2000 and 2001 years make no mention of an overall discretion regarding the payment of the bonus. The only exceptions stated in the documents are where an employee has faced disciplinary issues or has had extended leave without pay.
32. Also in evidence was a letter from an ex-employee of Prushka enclosing documents including extracts from the employment manual and other memos referring to the remuneration package. In that letter, the writer states:
You also mentioned that the bonus was on an ex gratia basis, first I’ve heard of it.
In fairness, the writer of that letter was not called for the purpose of cross‑examination. I can therefore give it only a little weight. However, other than Mr Mendelson and Ms Brown, no employees of Prushka were called to give evidence of their understanding of the operation of the bonus scheme.
33. On the evidence before me, I am satisfied that the bonus scheme was established to provide an incentive to employees of Prushka so that, if they were reasonably diligent in recovering debts on behalf of Prushka’s clients, a proportion of those commissions earned would be applied to a bonus pool for which they could become eligible. Bonuses that were paid to employees were dependent on the success the employees enjoyed in recovering debts. In other words, the bonus pool was directly related to the work efficiency of Prushka’s employees.
34. The oral evidence given by Mr Mendelson and Ms Brown regarding entitlement to a bonus payment is clearly at odds with the documents which were in evidence regarding the profit-share bonus scheme for the years in question. This does not include the documents dealing with the bonus scheme as amended in late 2002 or early 2003. Ms Wall submitted that the reason the documents were amended in late 2002 or early 2003 was that the Commissioner had already instigated an inquiry into Prushka’s superannuation guarantee payments. While I do not accept Ms Wall’s submissions that the subsequent amendment to the Prushka Manual supports the Commissioner’s argument that during the relevant years, there was no general discretion regarding payment of the bonus to eligible employees, I am satisfied that the bonuses were not wholly discretionary payments. That much is self evident from the documents. The only discretion recorded in the documents is in the case of disciplinary action being taken against an employee.
35. Although Mr Mendelson and Ms Brown were firmly of the view that there was no legal obligation to make any bonus payment even where the bonus pool existed, it is my view that such a claim would be difficult to sustain were an employee minded to insist on his or her legal rights. The job description which was given to persons seeking employment with Prushka contained a very clear representation about the salary expectations should they gain employment. Under the heading Salary is included a brief description of the profit-share bonus scheme. I have little doubt that an employee, if minded to do so, could rely on that representation to legally compel payment, provided the employee was eligible for a bonus payment. I therefore disagree with Mr Broadfoot’s contention that the payment could properly be described as ex gratia. That term is defined in the Dictionary of Modern Legal Usage, second edition, as: a favour, not by legal necessity.
36. Although the documents may have referred to the right of Prushka management to make variations to the bonus scheme, there is nothing in the documentary evidence relating to the 2000 and 2001 years which would suggest that the payment of the bonus was entirely discretionary. There seems to have been an attempt in late 2002 or early 2003 to state that was the case. However, that appears to have resulted from an attempt to satisfy the Commissioner that Prushka was under no legal obligation to make the payments. It is likely that the reference to ex gratia was made when Prushka first became aware of the Commissioner’s superannuation guarantee ruling SGR 94/4. In that ruling, the Commissioner explained that ex gratia payments were excluded from ordinary time earnings. Whether that is the correct interpretation of the SGA Act is something which I deal with below. Regardless, it seems that Prushka has attempted to take advantage of the ruling to take itself out of the possibility of incurring a superannuation guarantee shortfall.
THE MEANING OF Ordinary TIME EARNINGS
37. According to the Commissioner, SGS94/4 makes it clear that bonuses calculated by reference to work undertaken or sales made during ordinary work hours fall within the definition of ordinary time earnings. While that may be the view of the Commissioner, I cannot accept that on its face because, not only does the ruling not have the force of law, it cannot be used as an extrinsic aid in the interpretation of the statute. It does not fall within the provisions of s 15AB of the Acts Interpretation Act 1901.
38. The word earnings is not defined in the SGA Act. Accordingly, it should be understood to have been used in its ordinary sense. Earnings is defined in the Shorter Oxford English Dictionary as:
that which is earned by labour, or invested capital; the fact of deserving; what one deserves; gain, profit.
39. Mr Broadford submitted that the expression in respect of is used in many statutes and has been the subject of judicial interpretation on numerous occasions. He said it is clear that the phrase contemplates a nexus or connection between two subject matters; and the nature of the nexus required depends on the particular context in which the words are used. Mr Broadford referred me to the Federal Court decision in Hatfield v Health Insurance Commission (1986) 15 FCR 487. In that case, Davies J was dealing with the expressions decisions relating to the administration of criminal justice and decisions in connection with the investigation. He said, at 491:
Expressions such as "relating to", "in relation to", "in connection with" and "in respect of" are commonly found in legislation but invariably raise problems of statutory interpretation. They are terms which fluctuate in operation from statute to statute. As was said by Blackburn, Gallop & Neaves JJ in Butler v Johnston (1984) 4 FCR 83 at 87:
"It is clear that the words `in respect of ' can convey a meaning of wide import, but their exact width will depend upon the context in which they appear. Reference to individual cases in different statutes is of little assistance in determining their particular meaning. The court has to construe the meaning of the words with reference to the purpose or object underlying the legislation in which they appear (s 15AA of the Acts Interpretation Act 1901 (Cth))."
His Honour went on to say:
The terms may have a very wide operation but they do not usually carry the widest possible ambit, for they are subject to the context in which they are used, to the words with which they are associated and to the object or purpose of the statutory provision in which they appear.
40. The High Court (Wilson, Brennan and Toohey JJ; Deane and Gaudron JJ dissenting) in Smith v Commissioner of Taxation of the Commonwealth of Australia (1987) 164 CLR 513 dealt with the expression used in s 26(e) of the Income Tax Assessment Act 1936. The question before the Court was whether a sum of money paid to the appellant by reason of the successful completion of his course of study was a benefit given to him in respect of, or for, or in relation (directly or indirectly) to, any employment of him.
41. Brennan J said at, 520-521:
… Liability to tax under s 26(e) does not arise merely because the taxpayer is an employee of or has rendered services to the person from whom the allowance is received: e.g, a father's employment of a child does not necessarily make the value of a gift from the father to the child part of the child's assessable income. It is necessary that there be some connexion between the payment of an allowance to the taxpayer and either his employment or services he has rendered. …
It is not necessary that an allowance be paid as remuneration for the work which an employee is employed to perform; it is sufficient to attract s 26(e) that the allowance be paid to an employee in consequence of his employment…
42. Brennan J considered the nature of the activity in consequence of which a gift is made, seeking a causal relationship between the gift and the activity. He then said, at 523:
The difficult problem which arises under s 26(e) is to identify the nature and degree of the relationship, if any, between the allowing, giving or granting to a taxpayer of an allowance, etc. on the one hand and the taxpayer's employment or the services rendered by him on the other. The difficulty is the greater when the allowance is paid not in discharge of a legal obligation but voluntarily. There is no doubt that voluntary payments may fall within s 26(e): see per McTiernan J in Dixon [51] . If an allowance is paid under a contract between the payer and the taxpayer, the consideration for the payment is usually decisive of the matter "in respect of, or for or in relation ... to" which the allowance is paid, …
43. Brennan J acknowledged that where an allowance is paid voluntarily by an employer to an employee, the ascertainment of any relationship between the payment and the employment raises evidentiary problems. He went on to say, at 524:
… If the motive of the employer is communicated to the employee or is known by him, the common understanding of the motive for the payment may be cogent evidence of "how and why it came about that the gift was made". Again, there may be evidence of external indicia tending to show the reason for (or cause of) the payment…
44. Toohey J referred to a decision of the Supreme Court of Canada in Nowegijick v The Queen (1983) 144 DLR (3d) 193 at 200, which he adopted, where Dickson J said:
The words `in respect of' are, in my opinion, words of the widest possible scope. They import such meanings as `in relation to', `with reference to' or `in connection with'. The phrase `in respect of' is probably the widest of any expression intended to convey some connection between two related subject-matters.
45. In another case, Technical Products Pty Ltd v State Government Insurance Office (Qld) (1989) 167 CLR 45, the High Court again had to determine the meaning of the words in respect of in the context of the Motor Vehicle Insurances Act 1936 (Q). Brennan, Deane and Gaudron JJ said, at 47:
The words "in respect of" have a very wide meaning. Indeed, they have a chameleon-like quality in that they commonly reflect the context in which they appear. The nexus between legal liability and motor vehicle which their use introduces in s 3(1) is a broad one which is not susceptible of precise definition. That nexus will not, however, exist unless there be some discernible and rational link between the basis of legal liability and the particular motor vehicle.
46. Wilson J said, at 51:
It is true that the words "in respect of" may have a wide meaning but it is not correct to say that they extend to any relationship, however tenuous: see Workers' Compensation Board (Q) v Technical Products Pty Ltd [at p 566; p 267 of ALR] . The words take their colour from the context in which they are found.
47. It is proper to have regard to the underlying object of the legislation in considering its construction. This was clearly stated by Gray J in Quest Personnel Temping Pty Ltd v Commission of Taxation [2002] FCA 85 where he said, at paragraph 21:
The Act [SGA Act] is not a piece of ordinary taxation legislation. Its primary purpose is not the collection of revenue. It is designed to provide a system under which employers are encouraged to make payments to superannuation funds for the benefit of their employees. An employer who fails to make such contributions will be forced to pay an amount equivalent to the shortfall in contributions to the respondent by way of superannuation guarantee charge. The underlying object of the legislation is to benefit employees. The construction that favours this underlying object should be preferred to any that does not. A strict construction, such as might be adopted for ordinary taxation legislation, is inappropriate.
48. If one were to focus on the activity which gives rise to eligibility for the bonus payment, and take into account the underlying object of the legislation, the causal relationship between a bonus payment and the activity is clear. Also, because Prushka’s employees did not work any overtime during the relevant years, there can be no argument about the fact that the hours actually worked by the employees are properly described as ordinary hours of work. There was no evidence to the contrary.
49. The pool of funds, out of which the bonuses were paid, resulted from the work done by Prushka’s employees. The level of the bonus pool, which was available for distribution to employees by way of a bonus, was dependent upon the value of daily debt recoveries. So, for example, where the daily revenue was $20,000 during the 2000/2001 year, the bonus pool available to employees was $24,000. For every $500 increase in the daily revenue, the bonus pool increased by $2,100. In other words, the more effective employees were at recovering debts in the course of their ordinary work day, the greater was the bonus pool available. There is clearly a direct connection between the bonus pool and the work done by the employees. However, that is not the only connection.
50. To qualify for the bonus, an employee was required to reach a minimum revenue target for the month. Thus, only if an employee achieved a satisfactory level of recovery of debts, did the employee become eligible for payment out of the bonus pool. The fact that the bonus was regarded as part of an employee’s salary is evidenced from the job description where the criteria to be eligible for a team bonus are set out under the heading SALARY. While I accept Mr Mendelson’s evidence that from time to time eligible employees were not paid the bonus due to his exercising a discretion on disciplinary grounds, that does not, in my view, alter the position. Even if at times a bonus was withheld from an employee and at other times the payment was made, it is inescapable that when payments were made, they were in respect of the ordinary hours of work conducted by the employee. The fact that Mr Mendelson retained a discretion to make the payment does not convert these payments into what might properly be described as ex gratia payments. This is despite the fact that Mr Mendelson said payments were also made at times to staff who did not meet the qualifying levels of debt recovery. There was no evidence regarding why such payments were made other than Mr Mendelson saying that payment was made as an expression of thanks for hard work. Payments were not made as a favour to the employee. In fact, subject to some minor restrictions, an employee was generally entitled to the bonus on meeting the qualifying criteria
51. It seems to me that the proper construction of the nature of the payments made by Prushka to its employees under the bonus share scheme is that they are related to their ordinary hours of work. It does not therefore assist Prushka to describe bonus payments made to its employees as ex gratia payments. I must look at the substance of the payments and not merely the label which has been ascribed to them by Mr Mendelson and Ms Brown. I am satisfied, and therefore find, that payments made by way of a bonus out of the bonus pool to Prushka’s employees were payments made in respect of ordinary hours of work. I do not accept that they were ex gratia payments. I also do not accept that the bonuses were not calculated by reference to the work undertaken, the value of debts recovered or the performance of particular employees. The evidence clearly discloses that eligibility for a bonus payment was dependent upon the performance of the employee in the work which was required to be undertaken for Prushka, namely, the collection of debts. The greater the level of debts recovered, the greater the bonus pool became and an individual employee was more likely to meet minimum requirements and become eligible for a payment from that pool.
52. Ms Wall submitted that even if I were to find that the bonuses were not paid in respect of ordinary hours of work, they nevertheless fell within the definition of ordinary time earnings because they fell within the second limb of the definition, namely, earnings consisting of over award payments, shift-loading or commissions. I accept Ms Wall’s submission that a payment does not cease to be an over award payment simply because it is for work done outside ordinary hours. Further, it is clear from the evidence that the bonuses were paid as part of an incentive scheme designed to encourage Prushka’s employees to become proficient in recovering debts. As Mr Mendelson said in evidence, the sales and collection staff of Prushka were set targets for collection and for the sale of Prushka’s products. While the achievement of those targets was also used to assess how effective an employee was at their particular task, the profit-share bonus scheme was based on those performance figures determining whether the staff became eligible for a bonus. They were clearly designed as an incentive for employees, based on their performance. Although Mr Mendelson insists that the employees had no entitlement to share in the profit-share bonus, that, in my view, overstates the way in which the bonus scheme worked. In fact, employees had a right to expect to be paid a bonus upon achieving their production targets because that was the representation made in Prushka’s job description documents. Although Mr Mendelson said, and later made it clear in the Prushka Manual, that there were some caveats which should be attached to the representation, that does not alter the fact that the payments, when they were made, were made under the incentive scheme. In my view, that clearly makes them a bonus and they could quite properly be described as an over award payment.
53. Ms Wall also submitted that payments made to employees of Prushka by way of bonuses should be included in the definition of ordinary time earnings for the reason that they could be described as commissions. The word commission is not defined in the SGA Act. Its ordinary meaning, in the context in which it is used in the SGA Act is: pro-rata remuneration for work done as agent (the Shorter Oxford English Dictionary). I accept therefore that payments made to an employee on the basis of percentage of sales could properly be described as a commission. However, although the bonus pool funds were struck on the basis of a percentage of recoveries, as best I can tell from the evidence, payments made to eligible employees were not differentiated on the basis of debt recoveries of each individual employee, assuming of course that they met the minimum requirement. The pool was simply shared out between eligible employees. If that is correct, then it cannot be said that the bonus received by the employees was related directly to the debts recovered by any individual employee. There is of course an indirect connection, given that the bonus pool is made up from a percentage of total debt recoveries but, in my opinion, that does not make the payments commissions.
WERE THE BONUS PAYMENTS SALARY OR WAGES
54. In order to calculate the superannuation guarantee shortfall, the formula described in s 19(2) of the SGA Act must be applied. It involves calculating a percentage of total salary or wages paid by the employer to the employee for a quarter, multiplied by the charge percentage for the employer for the quarter.
55. Salary or wages is defined in s 11 of the SGA Act but it is merely an inclusive definition which, relevantly, includes a commission. As I explained above, I am not satisfied that bonus payments made by Prushka to its employees were commissions. The definition however includes payments made to a person under a contract referred to in s 12(3) of the SGA Act that are made in respect of the labour of the person working under the contract. Section 12(3) simply identifies a person as an employee if that person works under a contract that is wholly or principally for the labour of the person. Other than that, and this is not disputed, the term salary or wages should be given its ordinary meaning.
56. Although Mr Broadfoot referred me to the High Court decision in Murdoch v The Commissioner of Pay-roll Tax (Vic) (1980) 143 CLR 629, the Court in that case was dealing with the meaning of the word wages as that word was defined in s 3 of the Pay-roll Tax Act 1971 (Vic) (Pay-roll Tax Act). The ordinary meaning of wage as defined in the Shorter Oxford English Dictionary is: a payment to a person for service rendered; now esp. the amount paid periodically for the labour or service of a workman or servant. The word salary is defined as: fixed payment made periodically to a person as compensation for regular work; remuneration for services rendered.
57. In Murdoch’s case, the definition of wages in the Pay-roll Tax Act included payments by way of commission, bonuses or allowances paid or payable. The issue was whether payments made by the trustees of George Adams could be properly described as wages for purposes of the Pay‑roll Tax Act. Mason, Murphy and Wilson JJ said, at 641: if the payments in question were held be liable to pay-roll tax, it would be because they were bonuses paid to an employee as such. Mr Broadfoot submitted that had the definition in the Pay‑roll Tax Act not made specific reference to bonuses, the payments would not have been considered to be wages. He referred to their Honours’ acceptance of the description of a bonus given by the Judge at first instance, where he said at 642:
A bonus imports, in the case of an employee or agent, something given or paid over and above what is due and payable for his services. Often it is paid out of profit realised, in reward to those whose services have contributed to the making of the profit ... in the case of an employee the payment of a bonus is ordinarily made as a voluntary gift, ex gratia, in recognition of the extent to which the services of that employee have contributed to the making of the profit.
58. According to Mr Broadfoot, the manner in which the word bonus was used when considering the Pay-roll Tax Act in Murdoch is quite different to the language used in the SGA Act. Under the Pay‑roll Tax Act, bonuses were included in the definition of wages. However, there was no such inclusive definition in the SGA Act as far as salary or wages are concerned. Therefore, according to Mr Broadfoot, Murdoch’s case is to be distinguished on that basis. He submitted if the Parliament had intended to include bonuses in the definition of salary and wages in the SGA Act it would have said so. Further, because the Parliament chose to use the ordinary definition of salary and wages in the SGA Act, rather than the more expansive definition found in the Pay‑roll Tax Legislation, the withholding tax provisions and the income tax provisions in s 26(e) of the Income Tax Assessment Act 1936; it strongly supports a conclusion that bonuses were not intended to be included in the definition of salary and wages in s 11 of the SGA Act.
59. Mr Broadfoot also referred to the High Court decision in Social Credit Savings and Loans Society Limited v Federal Commissioner of Taxation (1971) 125 CLR 560. In that case the appellant society had, as its main activity, the making of loans to its members. Under the rules of the appellant company, any surplus resulting from its activities were distributable by way of bonus or rebate of interest on borrowings to members or as a bonus to any officer or employee. The appellant submitted that a surplus paid to officers and employees by way of bonus should be regarded as a working expense in the nature of wages. Gibbs J disagreed. He said the fact that there was a power to apply the whole surplus in favour of the officers and employees carried the consequence that the surplus did not belong to the persons who had made the interest payments (the members who borrowed). According to Mr Broadfoot, implicit in Gibbs J’s analysis is the proposition that because bonuses are of a different character altogether from wages, the mutuality status of the appellant must be denied.
60. Mr Broadfoot conducted wide-ranging research in to whether a bonus should be included in wages or salary. The cases he referred to concerned statutory definitions of the term wages where the term bonus was included in the definition. Accordingly, the findings of the various Courts were related only to the relevant statutory definitions with which the Courts were dealing. With respect to Mr Broadfoot, those cases add nothing to the understanding of the term bonus as it is used in the SGA Act.
61. The first significant difference in this case is that the bonuses paid by Prushka were clearly paid in an employment context and by reference to the specific performance of its employees as a group. They were not, as Mr Mendelson attempted to characterise them, ex gratia payments. Prushka represented to potential employees that the bonus scheme would apply to them after one month’s employment and that it would be part of the salary package.
62. Additionally, as I have found above, the bonus payments fell within the terms of the very wide definition of ordinary time earnings in the SGA Act. They could also be properly regarded as over-award payments. The payments were made in respect of ordinary hours of work. Having made that finding, it must logically follow that bonuses, which are included in ordinary time earnings, must form part of the employees’ salary or wages.
CONCLUSION
63. I am satisfied that bonuses paid to employees of Prushka were paid in respect of ordinary hours of work by those employees. Therefore, the bonuses must form part of those employees’ salary and wages. It follows that the bonuses must be taken into account when calculating the superannuation guarantee contribution. As they were not taken into account by Prushka, there must necessarily have been a superannuation guarantee shortfall and the Commissioner was correct in imposing a charge on that shortfall under the Superannuation Guarantee Charge Act 1992. It follows that the objection decision made by the Commissioner 17 July 2006 in respect the financial years ended 2000/2001 must be affirmed.
I certify that the sixty‑three [63] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr Egon Fice, Member
(sgd) Olympia Sarrinikolaou
Clerk
Date of Hearing 12 November 2007 and 21 April 2008
Date of Decision 28 August 2008
Counsel for Applicant Mr A. Broadfoot
Solicitor for Applicant Mendelsons Lawyers
Counsel for Respondent Ms M. Wall
Solicitor for the Respondent ATO Legal Services Branch
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