Super and employee payments: is the pendulum swinging back?

The media coverage and investigations by the Fair Work Commission into underpaid employee wages, benefits and superannuation makes you wonder whether the pendulum is swinging back towards employees.

One change in that direction is the recent super change, designed to correct longstanding failures by employers who have underpaid or made any super contributions for employees. This has involved introducing a superannuation guarantee amnesty and other laws so that amounts you have salary sacrificed to super are not used as a replacement for your employer’s compulsory super payments.

Super Guarantee amnesty

The amnesty provides a one-off opportunity to encourage employers to self-assess and correct any previous non-compliance with the super guarantee rules since they commenced. Employers who fail to provide information about super shortfalls to the ATO can face mandatory penalties that, once imposed, have little chance of reduction.

The superannuation guarantee system has been in place since 1992 and requires your employer to make contributions based on the amount you received for your ‘ordinary’ working hours. Employees include many types of occupations outside traditional employer/employee arrangements.

For example, if you provide mainly your labour in undertaking a contract then for super purposes you would be an ‘employee’ even though you may be considered a contractor when you are on the job.

If your employer pays less than the contribution required to a complying superannuation fund, a tax penalty applies and any super shortfall plus penalties and an administration charge is payable to the ATO. Employers do not get a tax deduction for the shortfall or any of the penalties. Once your employer makes the payment to the Commissioner, the shortfall which consists of any contributions and the interest component your chosen fund.

The one-off amnesty for super was hotly debated over the last few years before it became law. Any employer who wishes to receive the benefits of the amnesty must complete an ATO form and pay the employee’s super catch up payment within the amnesty period. Unlike the non-deductible shortfall amounts mentioned previously, any contributions paid by an employer under the amnesty are tax deductible. Also, there is no requirement for the employer to pay the administration component for any shortfall.

The amnesty period commenced on 24 May 2018 and ceases at midnight on 6 September 2020. The period to calculate the amount of the employee’s underpayment started on 1 July 1992 and ceased on 31 March 2018. Any employer superannuation guarantee shortfalls that occur after that time do not get any of the benefits of the amnesty.

The penalty that can be imposed by the Commissioner after the amnesty period acts as a serious incentive for employers to pay the shortfall amount to the ATO. The penalty is equal to 100% of the any compulsory contributions payable by the employer. But, in rare situations where records may be destroyed by flood, fire and similar catastrophes the Commissioner can reduce the penalty.

Where an employee’s shortfall amount is large it is possible that for the amount of employee’s total concessional contributions for the year will exceed their cap. This has the potential to result in an excess concessional contributions determination. However, this legislation recognises the likelihood of this happening and will exclude amounts paid under the amnesty from the excess. Also, for higher income earners any additional tax payable on the amount for Division 293 purposes will be disregarded.

Salary sacrifice integrity

The law has been changed from 1 January 2020 to stop employers using amounts that employees’ salary sacrifice to superannuation against the employer’s super guarantee liability. Previously, this allowed employers to reduce or eliminate compulsory super for employees. Compulsory super requires employers to contribute at least 9.5% of an employee’s salary earned for ordinary hours of work.

Case study

In this simplistic case study, let’s assume Wendy is on a remuneration package of $100,000 p.a. and decides to sacrifice $10k of it to super. Until 31 December 2019 employer contributions would be calculated on Wendy’s earnings for ordinary hours of work which would be $90,000. The employer’s super liability would be calculated on $90,000 (9.5%) is $8,550.

From 1 January 2020 Wendy’s employer will be required to calculate her super on her package prior to the reduction of the amount she salary sacrificed to super. The employer’s superannuation guarantee liability will now be $9,500 calculated as 9.5% of the net salary of $90,000 plus the amount salary sacrificed $10,000 which equals $100,000.

Increase in superannuation savings

These two integrity initiatives to the super guarantee legislation ensure an employer makes correct or more accurate contributions to superannuation for an employee. It is understood that around 7000 employers have made contributions as part of the superannuation guarantee amnesty. These changes plus others, especially since the changes from 1 July 2017 to employer and personal contributions, help increase the amount being saved via superannuation and retirement savings.