FEDERAL COURT OF AUSTRALIA Quest Personnel Temping Pty Ltd v Commissioner of Taxation [2002] FCA 85 SUPERANNUATION – superannuation guarantee charge – superannuation guarantee shortfall – contributions to superannuation fund calculated on minimum hours specified in contracts of employment – assessment of shortfall calculated on actual hours worked – whether assessment erroneous – whether actual hours worked were ordinary hours of work – whether regular, normal, customary or usual WORDS AND PHRASES – "ordinary hours of work" Superannuation Guarantee (Administration) Act 1992 (Cth) ss 6, 16, 17, 19, 20, 21, 22, 23, 33 Administrative Appeals Tribunal Act 1976 (Cth) s 44(1) Deputy Commissioner of Taxation v Australian Communication Exchange Ltd [2001] FCA 1664 referred to Kezich v Leighton Contractors Pty Ltd (1974) 131 CLR 362 applied Catlow v Accident Compensation Commission (1989) 167 CLR 543 considered Workers Rehabilitation & Compensation Corporation v Harle (1994) 61 SASR 507 applied Ashford v The Corporation (Halliburton) Geophysical Services Inc (1994) 57 IR 325 considered QUEST PERSONNEL TEMPING PTY LTD v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA V 201 of 2001 GRAY J 12 FEBRUARY 2002 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 201 of 2001 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: QUEST PERSONNEL TEMPING PTY LTD APPLICANT AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: GRAY J DATE OF ORDER: 12 FEBRUARY 2002 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's costs of the proceeding. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 201 of 2001 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: QUEST PERSONNEL TEMPING PTY LTD APPLICANT AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: GRAY J DATE: 12 FEBRUARY 2002 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 This appeal from the Administrative Appeals Tribunal ("the Tribunal") raises the question of the meaning of the phrase "ordinary hours of work" used in legislation relating to superannuation. The question arises specifically in relation to a number of employees who worked customarily for numbers of hours greater than the minimum hours specified in their contracts of employment. The legislation 2 The Superannuation Guarantee (Administration) Act 1992 (Cth) ("the Act") provides, in essence, a scheme for the collection from employers of a levy that reduces to the extent to which an employer has made contributions to a recognised superannuation fund on behalf of the employees of that employer. 3 Section 16 of the Act provides that a superannuation guarantee charge imposed on an employer's superannuation guarantee shortfall for a year is payable by the employer. Section 17 provides for the aggregation of shortfalls if there is more than one superannuation guarantee shortfall within a year. Section 19 provides for the calculation of a shortfall, according to a percentage specified by s 20, if the employer was the employer for the whole of the relevant year, or s 21 if the employer was the employer for part only of the relevant year. Section 22 provides for a reduction of the percentage where the employer has made contributions to a defined benefit superannuation scheme. Section 23 provides for a reduction of the percentage in cases where the employer has made contributions on behalf of an employee to other forms of superannuation funds. By s 23(5), if an employer contributes to a superannuation fund for the benefit of an employee, the charge percentage is reduced according to a formula. One element of that formula is the percentage of the contribution to the fund as a proportion of the total amount of the employee's "ordinary time earnings". 4 Section 6 of the Act contains a definition of the phrase "ordinary time earnings" 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) a payment in lieu of unused annual leave within the meaning of subsection 26AC(1) of the Income Tax Assessment Act 1936; (C) a payment in lieu of unused long service leave within the meaning of subsection 26AD(1) of the Income Tax Assessment Act 1936; 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 contribution period—the maximum contribution base". 5 For the purposes of this proceeding, the focus is on the phrase "ordinary hours of work" in subpar (a)(i) of this definition. The nature of the proceeding 6 In respect of the years ended 30 June 1997 and 30 June 1998, the respondent assessed the applicant as having superannuation guarantee shortfalls in respect of a number of employees. The assessment was based on the proposition that the applicant should have made contributions to a superannuation fund in respect of a number of employees, calculated on their earnings for the actual hours worked by them, rather than the minimum hours specified in their contracts of employment. 7 On 23 June 1999, the applicant's solicitors forwarded a notice of objection to these assessments. By decision dated 29 October 1999, the respondent disallowed the objection. On 24 December 1999, the applicant applied to the Tribunal for review of that decision. On 20 February 2001, the Tribunal published its decision, affirming the decision under review. 8 From that decision of the Tribunal, the applicant appealed to this Court. By s 44(1) of the Administrative Appeals Tribunal Act 1976 (Cth), such an appeal is limited to a question of law. Three questions are specified in the application. One sought to raise what was really an issue of fact and was not pursued at the hearing of the appeal. The other two raise, in different terms, the construction of the phrase "ordinary hours of work" in the context of the definition of "ordinary time earnings" in s 6 of the Act. 9 Both before the Tribunal and in this Court, the applicant pursued only issues arising from its employment of a number of persons for the purpose of the applicant's compliance with one contract. At an earlier stage, issues relating to other contracts entered into by the applicant had been raised, but they were not pursued either in the Tribunal or in this Court. The facts 10 In its reasons for decision, the Tribunal summarised a body of evidence given on behalf of the applicant. It is implicit in those reasons for decision that the Tribunal accepted that evidence. The following summary of facts is taken from the Tribunal's summary of that evidence, and from specific findings of fact expressed in the reasons for decision of the Tribunal. 11 In 1995, the applicant tendered successfully for a contract to provide skilled data entry operators to work in the Central Data Entry Bureau of the Victoria Police. The resulting contract required the provision of staff twenty-four hours per day on every day of the year. Up to twenty operators were required per shift and an estimated 2,025 hours needed to be worked each week. In compiling its tender, the applicant estimated that a pool of between seventy-five and eighty-five persons working five shifts per fortnight was required to fulfil the obligation. 12 The applicant engaged employees to perform the contract. Each employee received a written offer of employment. The standard offer of employment indicated that the hours of work were "A minimum of five standard shifts each fortnight as notified by Quest from time to time." In the case of some of its employees, the applicant offered employment on the basis of a minimum of three standard shifts each week. In other cases, it specified seven hours thirty-six minutes per rostered day or between 8.00 am and 4.00 pm. In some cases, work was merely required "As notified by Quest from time to time". These other variations do not appear to have been common, if they occurred at all, in relation to those engaged to perform work for the Victoria Police. A standard shift was of seven and a half hours' duration. 13 An account manager employed by the applicant was responsible for ensuring that all shifts were fully staffed. At the beginning of each month, employees were asked which shifts they would prefer to work and a roster for the month was prepared. The account manager maintained a list of employees who were prepared to work additional shifts beyond the minimum specified in their offers of employment. Such employees were offered additional shifts to cover roster shortfalls or to replace rostered employees who became unavailable. Some employees were unable to work additional shifts, some were keen to work additional shifts, some preferred to work on weekends and some at night. Additional shifts were voluntary and no employee was or could be compelled to work them. The employees were paid at standard hourly rates, with no loading for additional shifts, although the applicant treated additional shifts as overtime and not as ordinary time, for the purpose of making its superannuation contributions. 14 The estimates made before the performance of the contract began proved to be inaccurate. If each employee had worked five standard shifts per fortnight, 108 employees would have been necessary to provide 2,025 working hours per week. Although there were times when fewer than 2,025 hours were required, the numbers of persons employed to fulfil the contract varied from the high sixties to the high eighties. There was a constant need for additional shifts to be worked. Some employees worked extra shifts regularly, some occasionally and some not at all. Whether an employee worked additional shifts depended upon the desire, or at least the readiness, of that employee to do so. There was no compulsion. Looking at the records in retrospect, it was possible to see that a number of employees regularly worked more than the minimum number of shifts in their offers of employment. One example of which evidence was given was an employee who, in the year ended 30 June 1997, worked either four or five standard shifts per week (ie between eight and ten per fortnight) in each of forty-four weeks of the year. The reasoning of the Tribunal 15 In its reasons for decision, the Tribunal referred to High Court authority relating to legislative expressions similar to "ordinary hours of work". The Tribunal expressed the view that: "if it was normal, regular, customary or usual for the employee to work more than that minimum number of shifts, it is difficult to see that those actual hours worked were not 'ordinary hours of work'. In one sense, the meaning of ordinary can be considered as the opposite of extraordinary. If the additional shifts worked on a normal or regular basis could not be said to be extraordinary, being other than ordinary or unusual, it is difficult to see that they are not ordinary hours of work." 16 The Tribunal was satisfied that the applicant could not meet the requirements of its contract if all of the employees worked no more than five standard shifts per fortnight. It said: "Therefore, it was and had to be normal, usual, regular for additional shifts to be worked. Some employees clearly sought to work more and some were prepared to do so if requested. I am unable to see that the hours actually worked, in the context of the employment arrangements entered into here, were not the ordinary hours of work." 17 The Tribunal recognised the possibility that some individual employees might work an occasional shift beyond the minimum specified, to help out in an emergency. In such a case the additional hours would be extraordinary and unusual. The Tribunal pointed out that it had no evidence that would allow it to find which, if any, employees could come within that category. It followed that the actual hours of work of the employees were the ordinary hours of work, their earnings were ordinary times earnings and the applicant was liable for a superannuation guarantee charge in respect of the shortfall in the relevant years. The meaning of "ordinary hours of work" 18 The definition of "ordinary time earnings" in s 6 of the Act is designed to cover all situations of employment. Many employees work on terms and conditions that are specified by awards or industrial agreements. In such cases, it is common for the instrument governing the terms and conditions of employment to specify what are the ordinary hours of work. In some cases, it may be necessary to construe the instrument, for the purposes of determining what earnings can be regarded as ordinary time earnings for the purposes of the Act. An example is to be found in Deputy Commissioner of Taxation v Australian Communication Exchange Ltd [2001] FCA 1664, in which the Full Court had to construe a state industrial award for the purpose of determining what were the ordinary time earnings of casual employees. 19 Counsel for the applicant in the present case attempted to equate the offers of employment made to the applicant's employees with such an industrial award or agreement. He contended that the employees could only be obliged to work the minimum number of standard shifts specified in the offer of employment, so that all work done in excess of these standard shifts should be regarded as overtime, and therefore not as ordinary hours of work. The analogy fails. The offers of employment specified the minimum hours for which an employee could be called upon to work. The clear import of the word "minimum" was that an employee could be expected to be asked to work more than five standard shifts in a fortnight. An industrial award or agreement usually expresses the maximum hours that an employee may be required to work. It is true that provision is often made for work beyond such standard hours, but it is usual for the award or agreement to provide that such additional work is to attract a higher level of remuneration. This is what marks it out as work performed outside ordinary hours. 20 The phrase "ordinary hours of work" in s 6 of the Act must be construed in the context of the Act and in a way which best promotes the underlying object or purpose of the Act. It is plain from the definition of "ordinary time earnings" in s 6 that, at least in some cases, ordinary hours of work are to be distinguished from actual hours worked. The Act does not require that the relevant percentage of an employee's total earnings for all hours worked must be paid to a superannuation fund in order to avoid the levy. On the other hand, there will be some cases in which the ordinary hours worked by an employee will be the actual hours worked, because no ground will exist for distinction between the two concepts. An example would be an employee whose terms and conditions of employment are covered by an award and who works the maximum standard hours but no overtime. 21 The 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. 22 Some assistance can be gained from authority. In Kezich v Leighton Contractors Pty Ltd (1974) 131 CLR 362, the High Court of Australia construed the expression "the ordinary hours he would have worked" in legislation dealing with workers compensation. At 364 – 365, Gibbs CJ said: "What has to be determined is the meaning that those words have in the Act and since the words 'ordinary hours' are common English words they should, in accordance with established principles of statutory construction, be understood in their natural meaning unless the context otherwise requires. The word 'ordinary' means 'regular, normal, customary, usual'. A man's 'ordinary hours' of work are the hours during which it is usual for him to work. There is nothing in the expression 'ordinary hours' that connotes payment at any particular rate, and to understand the words as meaning 'hours during which work is done for which overtime is not paid' would be to place upon them a meaning which they simply do not bear. The expression 'the ordinary hours he would have worked' in my opinion means the same as 'the hours he would ordinarily have worked' and it is of course no reason to depart from the proper meaning of the words because the same meaning could have been achieved by a different form of words; in the collocations to which I have just referred the use of the adjective instead of an adverb does not change the sense of the expression. With respect, I cannot agree with the suggestion that if the phrase is construed in this way the word 'ordinary' would add nothing to its meaning. If the word 'ordinary' where it appears before 'hours' had been omitted from cl. 2, it would not have been clear whether, in the common case in which a workman's hours of employment had varied from week to week, depending upon whether he had worked overtime and on how much overtime he had worked, the hours mentioned were to be determined by ascertaining what hours were ordinarily worked or by taking an average or in some other way. As the clause stands, what has to be determined is what were the hours the workman would ordinarily have worked had he not been incapacitated. The workman is then to be paid the wage he would ordinarily have received for working those hours. The clause is not concerned with the question whether the 'ordinary wage' included something extra for overtime, but solely with the question what was ordinary for the particular worker concerned." 23 At 368, Mason J, after considering the case of a worker who worked only standard hours prescribed by an industrial award, said: "Special problems arise in the case of a casual or shift worker whose hours of work are remunerated otherwise than by reference to the ordinary rate of pay. Assuming that such a worker intended to continue casual or shift work it could not be said that, if he were not incapacitated, he would have worked any 'ordinary hours' in the sense which the respondent gives to that expression. An endeavour was made to vault this yawning chasm by saying that the hours which would have been worked not exceeding the number in a week stipulated in the award should be treated as ordinary hours. However, there is no warrant for this course in the basic interpretation put forward by the respondent." 24 Menzies and Stephen JJ expressed their agreement with both Gibbs CJ and Mason J. 25 In apparent contrast to Kezich is the judgment of the High Court of Australia in Catlow v Accident Compensation Commission (1989) 167 CLR 543. In that case, at issue was the construction of the phrase "worker's normal number of hours per week" in legislation relating to workers compensation. By majority, the Court held that the normal number of hours was the time fixed by the relevant award, industrial agreement or contract as the standard hours, and not the number of hours normally worked. At 560 – 561, McHugh J, with whom Deane and Dawson JJ agreed, said: "Industrial awards and agreements usually state the number of ordinary working hours in each day and week and provide for the payment of overtime and penalty rates of pay for hours worked outside those ordinary hours … Thus, in the present case the industrial agreement under which the appellant was employed provided that the ordinary hours of work should be an average of thirty-six per week which were to be worked in the manner specified 'without payment of overtime': cl. 3. Against the industrial background of awards and agreements fixing a number of ordinary hours per week, it seems natural to read the expression 'calculated at the worker's ordinary time rate of pay for the worker's normal number of hours per week' as a reference to the ordinary time rate of pay for the worker's standard or ordinary hours per week as fixed by award, agreement or contract." 26 The distinction between these two cases appears to rest upon the proposition that the fixing by collective means of standard hours of work, coupled with a provision for remuneration at a higher rate of hours worked beyond those standard hours, will usually lead to the conclusion that the standard hours fixed are to be considered as "normal hours" or, perhaps, "ordinary hours". As I have said, that is not the present case. The offers of employment accepted by the employees in the present case did not purport to fix standard hours, with remuneration at a higher rate for hours in excess of them. They fixed only minimum hours, with hours worked beyond the minimum paid at the same rate as those worked within it. 27 As is demonstrated by Kezich, there may be cases in which the working of hours beyond fixed standard hours becomes so regular, normal, customary or usual that the additional hours are to be regarded as ordinary hours for a particular employee. This may be so notwithstanding that the additional hours are remunerated at overtime rates or penalty rates. In Workers Rehabilitation & Compensation Corporation v Harle (1994) 61 SASR 507, the Full Court of the Supreme Court of South Australia considered the meaning of the word "overtime", again in workers compensation legislation. At 518, Perry J, with whom Mullighan J agreed, said: "The award is used simply to give content to the contract of employment. That contract then becomes a matter to be taken into account in determining whether, for the purposes of the Act, the worker should be regarded as working overtime or not. I use the expression 'take into account' as it is the ordinary hours actually worked, not the ordinary hours provided for in a particular award or contract, which is important. But in many instances, probably most cases, there will be no difference between the normal hours of work provided in the contract of employment (which in turn may simply reflect the terms of the relevant award) and the normal span of hours ordinarily worked. Where there is a difference, it must be the actual span of hours ordinarily worked to which regard must be paid, rather than any award prescription, or the provisions of a contract based on the award." 28 At 519, Perry J continued: "if a particular worker, notwithstanding the terms of the award, is engaged upon the basis that he would normally work a span of hours different from the normal hours of work contemplated by the award. A worker who is engaged on such terms could, in my opinion, successfully contend that, notwithstanding the terms of the award, his normal hours of work were defined specifically by the actual arrangement entered into with the employer." 29 These passages were subsequently cited with approval by the Full Court of the Supreme Court of South Australia in Ashford v The Corporation (Halliburton) Geophysical Services Inc (1994) 57 IR 325 at 327-8. 30 On the basis of these authorities, the Tribunal was correct to conclude that the ordinary hours of work of an employee of the applicant, doing work for the Victoria Police, were the normal, regular, customary or usual hours worked by that employee. If the normal, regular, customary or usual hours of a particular employee were more than the minimum specified in that employee's offer of employment, then the actual hours worked were the "ordinary hours of work", for the purposes of the definition of "ordinary time earnings" in s 6 of the Act. 31 This conclusion also operates to promote the underlying purpose or object of the Act. It would tend to defeat that underlying purpose or object if an employer, by engaging employees on the basis that they would work for a low specified minimum, could avoid the obligation to pay superannuation contributions (or the charge in lieu of those contributions) in respect of much greater hours habitually worked by the employees. Counsel for the applicant argued that it was unrealistic to believe that an employer would be able to attract employees by offering them very low minimum hours. This is not necessarily so. People might be prepared to enter into contracts specifying very low minimum hours if they understood that they were habitually to be offered hours well above the minimum. In a labour market dominated by high unemployment, many people may feel that they had no choice but to accept a contract specifying a low minimum. The point is that the fixing of the extent of the obligation to pay superannuation contributions (or the charge in lieu of those contributions) should not be left to the employer concerned. It should depend upon the objective circumstances of the work performed. Otherwise, the underlying purpose or object of the Act will be undermined. Nor is it to the point that s 30 of the Act contains an anti-avoidance provision, pursuant to which the respondent can ignore an arrangement which, in the respondent's opinion, was made solely or principally for the purpose of avoiding payment of superannuation guarantee charge otherwise than in accordance with the Act. Such provisions in taxation legislation have been found to be difficult to apply. 32 Some reference was made to a draft ruling of the respondent, made on 15 September 1994, endeavouring to explain the application of the definition of "ordinary time earnings" in s 6 of the Act. As the ruling itself recognises, it does not have the force of law. It certainly cannot change the construction of the Act it purports to explain. In any event, the draft ruling concerned offers little comfort to the applicant. The relevant clauses relating to ordinary hours of work are as follows: "7. The ordinary hours of work may be specified in a statute or under an industrial award. If so, the ordinary hours specified are also the ordinary hours of work under the SGAA. 8. If an employee is not covered by an award, but has agreed to work a certain number of hours, those hours are the employee's ordinary hours of work. The hours agreed will be determined in the light of all the circumstances (for example, hours actually worked, the industry norm, or what is contained in any written agreement). 9. If the ordinary hours of work are not specified or agreed, the ordinary hours of work will be the hours actually worked and any hours of paid leave. 10. Ordinary hours of work are not limited to hours between 9 am to 5 pm, Monday to Friday. They could include night and weekend shifts." 33 Paragraph 8 of the draft ruling expresses the sensible view that what is contained in a written agreement is not conclusive of an employee's ordinary hours. It is clear that hours actually worked on a habitual basis will be regarded as ordinary, even if for some other purpose some of those hours are remunerated at overtime rates. As I have said, this accords with the object of the Act. 34 Counsel for the applicant also made some attempt to argue that the scheme for collection of the superannuation guarantee charge, laid down in the Act, required certainty as to what were ordinary hours worked, rather than calculation after the event. An examination of the provisions of the Act as to the collection of the charge destroys this argument. The formula for calculation of an employer's quarterly shortfall, expressed in s 19(2) of the Act, has as one of its elements total salary or wages paid by the employer to the employee for the quarter concerned. Such a total can only ever be known at or after the end of the quarter. Section 23(6A) allows an employer twenty-eight days after the end of the financial year to make the requisite contributions to a superannuation fund for the benefit of an employee, as if the payment had been made in any of the contribution periods in the year. In other words, contributions paid up to and including 28 July are treated as having been made during the preceding financial year. Section 33(1)(a) requires the lodging of a statement by 14 August. It makes provision for the respondent to allow a later date. Not only is the formula based on retrospective calculation, but the times by which obligations are to be discharged in order to avoid the requirement to pay the levy are fixed so as to enable calculations to be made with respect to hours actually worked and amounts actually paid. 35 As the Tribunal pointed out, under the arrangements adopted by the applicant to fulfil its contract with the Victoria Police, from time to time there will be employees who work shifts over and above the minimum in circumstances in which the working of such shifts cannot be said to be regular, normal, customary or usual. In such cases, the additional hours worked will not have to be taken into account in calculating the amount of superannuation contributions required in respect of that employee, or the amount of the superannuation guarantee charge if such contributions are not paid. If the applicant had presented to the Tribunal evidence enabling the Tribunal to make such a finding in any case, it may be that the applicant would have been able to justify an assessment on a basis different from that adopted by the respondent. As the Tribunal records in its reasons for decision, the applicant did not provide such evidence. 36 For these reasons, the question of law raised by this appeal must be decided against the applicant. On the facts found by the Tribunal, the assessments of superannuation guarantee charge owed by the applicant to the respondent in respect of the financial years ended 30 June 1997 and 30 June 1998 were correct. The Tribunal's decision is correct as a matter of law. The application must therefore be dismissed. The applicant should pay the respondent's costs of the proceeding. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gray. Associate: Dated: 12 February 2002 Counsel for the Applicant: T Murphy Solicitor for the Applicant: Rigby Cooke Counsel for the Respondent: I Young Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 19 September 2001 Date of Judgment: 12 February 2002