Many Australian business owners have heard of the term 'ordinary time earnings' (OTE) in passing, but few are familiar with the details of the concept. What exactly does it mean, how is it calculated, and why does it matter? This article will answer each of these questions by providing an overview of OTE, what it involves, and why it's an important metric to consider when contributing to your employee’s super fund.
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Payroll
Ordinary Time Earnings Explained
What is ordinary time earnings?
OTE refers to the amount of money an employee earns from their ordinary hours of work. This usually doesn't include overtime or additional allowances, as these payments are generally not considered to fall under an employee's ordinary hours.
Which payments fall under OTE?
The Australian Taxation Office (ATO) offers a detailed list of payments that fall under OTE, including:
- Salaries and wages
- Allowances, bonuses and commissions paid to employees as part of their typical work hours
- Payments for public holidays taken during an employee's ordinary working hours
- Overtime payments worked outside of an employee's hours of work if overtime is a regular, consistent aspect of their employment
- Shift loadings paid as part of an employee's hours of work
- Paid sick, maternity, paternity, carers and adoption leave
- Paid personal leave
- Payments for allowances related to work, including tools, equipment and uniform, provided they are not considered to be a reimbursement for expenses
Which payments do not fall under OTE?
Some types of payment do not fall under OTE in Australia. These include:
- Certain allowances and reimbursements, such as one-time travel or accommodation reimbursements
- Payments made to genuine independent contractors who are not considered employees by law
- Overtime payments for overtime work that is not a consistent part of an employee's work routine
- Lump sum payments for termination or redundancy
Note that OTE requirements vary based on industry, employment and an employee's contract. Employers should seek the advice of a professional to determine which payments need to be included in an employee's OTE.
How is OTE calculated?
It can be challenging to calculate OTE because there are many different types of payment to consider. However, employers need to be diligent and take everything into consideration to ensure they are paying the correct amount to their employees' super funds.
OTE can be calculated weekly, monthly or quarterly, depending on the circumstances and payroll schedule. If an employee works variable hours each week or works casually, it makes sense to calculate their OTE more frequently. Alternatively, if an employee is paid a fixed annual salary, an employer may only need to calculate OTE once per month or once per quarter.
Here are some of the most important steps to help employers calculate OTE.
Identify the employee’s work hours
The first step is determining an employee's ordinary working hours as defined by their contract. If the employee is paid by the hour, the number of hours worked in a month should be multiplied by their hourly rate to find the correct monthly salary.
Factor in leave payments
If an employee has taken leave during the pay period, leave payments must be calculated at the employee's usual pay rate. Leave payments must be made for sick leave, maternity or paternity leave, annual leave, and any other types of paid leave.
Consider additional earnings
After determining the employee's salary and factoring in leave payments, the next step is identifying any additional earnings that fall under OTE. Consider any bonuses, allowances and commissions associated with an employee's regular working hours. Note that allowances made to cover accommodation, travel or meal expenses are not included in OTE.
Add everything together
Once you've collected all the necessary financial information, add everything to determine the employee's OTE for the pay period.
Calculating OTE - example
Let's look at an example to better understand how OTE is calculated.
John is a full-time employee who earns a base salary of $36,000 per year. He also receives a 10% sales commission for each sale he makes at work. John has made $10,000 in sales this month, meaning he takes home an additional $3,000 (30,000x10%). John also receives a $150 shift allowance per week. To calculate John's OTE for the month, add each payment together.
$3,000 (base salary/12) + $1,000 (commission bonus) + $600 ($150 x 4 weeks) (shift allowance) = $4600
Why is OTE important?
Calculating OTE is essential because it determines the amount of money employers need to contribute toward their employee's Superannuation Guarantee (SG). Employers must pay 11.5% of an employee's OTE into their super fund as defined by the Superannuation Guarantee (Administration) Act 1992. This is set to rise to 12% by 2025 and continue increasing incrementally over time.
Employers who fail to deliver the correct amount of super to their employees on time may need to pay the super guarantee charge, a fine calculated based on the amount owed.
The amount of money an employer pays into a worker's super fund is based on an employee's OTE. If an employee's OTE increases, the amount of money employers need to contribute to the super fund rises too.
Calculating SG contributions - example
To understand the process for calculating Superannuation Guarantee contributions, consider this example.
Mary is a full-time worker earning a base salary of $75,000 annually. She is given a $50-a-week shift allowance during the year. At the end of the year, she also receives a $5,000 Christmas bonus.
First, calculate Mary's OTE for the year:
$75,000 (base salary) + $2,600 ($50 x 52 weeks) (shift allowance) + $5,000 (bonus) = $82,600
To calculate the necessary SG contribution, multiply Mary's OTE by the current SG rate (11.5% as of July 2023):
$82,600 x 11.5% = $9,499
This means that Mary's employer needs to pay $9,499 over the year into Mary's super fund.
How Quickbooks can help
Tracking OTE is essential when it comes to paying the correct amount of SG to your employees. Using payroll software like QuickBooks makes it simple for you to manage your finances, track your employees' hours, and always stay in the know about upcoming payments.
QuickBooks cloud payroll software lets your employees quickly clock in and out, so you always have up-to-date information about hours worked. Easy record-keeping functions make sure you always have accurate documents ready for tax time.
In addition, QuickBooks makes sending payments easy. With automatic payment due notifications, tax calculators and multi-currency support, QuickBooks ensures you pay the right amount on time, every time.
Don't miss out on the benefits of QuickBooks' easy-to-use employee tracking and payment features. Try the accounting software for free today with a 30-day free trial.
While every care has been taken to ensure the accuracy of the information presented as at 12 April 2024, Intuit is not providing you with professional advice and we recommend you obtain your own professional advice. Intuit is not liable for your use of the information presented.
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