Superannuation
Ordinary time earnings
Ordinary time earnings are the amounts an employee earns for their ordinary hours of work, and they are generally the base on which employers calculate super guarantee contributions.
Ordinary time earnings, or OTE, is the term used to describe what an employee earns for their ordinary hours of work. It is the main base on which employers calculate their super guarantee obligations. Because super is calculated on OTE rather than all payments, it is important for employers to understand what is included and what is not, otherwise they may pay too little or the wrong amount.
In general, OTE includes the earnings an employee receives for their ordinary hours of work, such as salary and wages, commissions, shift loadings, allowances that are not reimbursements, and some bonuses linked to ordinary work. It can also include payments for paid leave such as annual leave and sick leave. Different payments can be treated differently, and the rules about what exactly counts are complex.
In contrast, payments for overtime hours are generally excluded from OTE. Some other items are also excluded, such as expense reimbursements, genuine redundancy payments and payments made after an employee ceases work in some situations. Whether an allowance is included depends on the nature of the allowance, and whether it compensates for the employee's work or reimburses a cost. The ATO provides detailed guidance and the answer may also depend on the terms of an award.
Employers must work out the OTE for each employee in each pay period, and calculate the super guarantee on it at the rate then applicable. The rate is set by legislation, so check ato.gov.au. Payroll software normally does this once the pay items have been set up correctly, and each item needs to be classed as OTE or not OTE. A common problem is a wrongly configured pay item that results in underpaid super.
There is also an upper limit. The maximum super contribution base sets a cap on the OTE per quarter for which employers need to pay SG. Where an employee earns more than the cap, the employer is not required to pay SG on the excess, though they can do so voluntarily. The cap is indexed and published by the ATO.
GST does not apply to wages or OTE. Employers cannot claim GST credits for the payments of salary, but they may claim credits for the GST in costs of running payroll, such as software subscriptions, provided they hold tax invoices. A frequent misunderstanding is that OTE is the same as total gross pay. In truth it can be lower, especially where an employee receives significant overtime or reimbursements.
This is general information only, so check your own payroll items with the ATO or a registered tax professional.
Worked example
An employee earns $1,400 for ordinary hours in a week, plus $200 overtime and a $50 reimbursement of tool costs. OTE is $1,400, since overtime and reimbursements are generally excluded. Using a hypothetical 10% rate only to show the arithmetic, super for the week would be $1,400 x 10% = $140, not calculated on the full $1,650 paid. The actual rate is the one set by law.
Practical tips
- Review how every pay item in your payroll software is classified, and ask your adviser if unsure about allowances.
- Check your award, since some awards require super on more than the minimum OTE.
- Remember that OTE is capped each quarter by the maximum super contribution base, and check the current figure on the ATO website.