2.1 The SG system is one component of Australia's retirement income policy and compliments the age pension and voluntary superannuation contributions. Over time, SG is intended to reduce the need for future generations of taxpayers to pay more to fund age pensions for the increasing number of retired people. SG will be of particular importance to individuals who cannot afford to make voluntary superannuation contributions, who will mainly be lower to middle income taxpayers.
2.2 Importantly, the historical context of the SG system reinforces the framing of employer superannuation as an employee entitlement, no different to salary and wages apart from its age-based restrictions on its access.
2.3 Generally, the SG system works well for the majority of Australians. In 2008-09, $71.1 billion in employer contributions were made to superannuation funds, a significant increase from 2001-02 where there were $28.6 billion in such contributions.1 It should be noted that this employer contribution amount includes both mandated SG contributions and salary sacrifice amounts. In 2007-08 the ATO's compliance activities raised a further $390 million in SGC liabilities, with a slight decrease in 2008-09 to $377 million.
2.4 However, there are a number of barriers in quantifying the level of SG non-compliance as a means of determining the financial impact of SG non-compliance on employees and the percentage of employees affected across market segments, in particular the quantum of the salary sacrifice component.
2.5 The people most at risk with the current SG system are the employees who are the least empowered or incorrectly classified as 'independent contractors' — and it is these very people who are most reliant upon compulsory superannuation contributions for a higher standard of living in retirement than only relying on the age pension.
2.6 The review made the following findings:
- Over an eleven year period, the difference between SGC raised and SGC collected has accumulated to $936.1 million, increasing substantially from 2000-01. Together with the current SGC debt relating to insolvent employers, approximately $600.8 million in SGC raised by the ATO has not been recovered, with most of this debt having been written-off and representing known lost employee retirement savings.
- The above amounts represent known SG non-compliance as they have been raised through the employer lodging a SGC Statement or the ATO issuing a default assessment. The actual SG non-compliance could actually be much greater than the figures suggest. If there is no Employee Notificiation (EN) complaint lodged by an employee then the non-payment may go undetected, again representing lost employee retirement savings and higher government outlays for social security payments.
- The ATO's SG compliance survey in 2006 found that the employee segments that are a high risk of having insufficient SG contributed on their behalf were as follows:
- employees of micro businesses;
- contracted and casual employees;
- younger employees; and
- employees who work in particular sectors — the arts and recreation services; the transport, postal and warehousing sectors; accommodation and food services; and the agriculture, forestry and fishing sector.
- An analysis of the SG 2006 survey data also revealed that the mean salary and wages across each of these high risk segments is less than $30,000 a year, indicating that those most at risk of having insufficient SG contributed on their behalf by employers were low-income employees.
- This survey concluded that the data matching approach was a better predictor of extensive non compliance. In addition it found that the analytics approach was a better predictor of the incidence of non-compliance, but risk scores alone were not sufficient to predict the extent of non compliance.
- Submissions and evidence received by the IGT expressed concern with the growing practice of employers misclassifying workers as subcontractors, rather than employees, to avoid paying superannuation. The Australian Bureau of Statistics (ABS) Forms of Employment Survey found that there are now 967,000 independent contractors, with nearly a third of those in the construction industry. Nearly all of the businesses working in the construction industry are small businesses and collectively are responsible for 82 per cent of all employment in this industry.
- The ATO is heavily reliant on EN complaints as a source of risk identification in the SG system — of the total 24,195 SG audit activities, 20,199 related to EN complaints. In 2009-10 proactive risk based auditing will still only represent 27 per cent of the ATO's total SG audit activities, up from 16 per cent in 2008-09.
- Any risk identification system that overly relies on employee engagement, despite the growing problem of member apathy or disengagement with their superannuation, is bound to have limited effect in driving systemic improvement in SG compliance. While the SG system is a self-assessment system, the types of employees that are most vulnerable to non-compliance, the market-specific nature of the risk and the impact on employees requires that the ATO play a more proactive role where there is a higher risk of non-compliance.
- Over 70 per cent of such EN complaints come from ex-employees with anecdotal evidence suggesting that many employees are concerned that, if they query their employer about their SG entitlement or lodge a complaint with the ATO, then they could either lose their job or no longer be given work. This is particularly relevant in the micro-business sector where there are a greater proportion of groups that are more vulnerable to employer non-compliance, including casual, part-time and those from non-English speaking backgrounds.
- There is a considerable timeframe, approximately 22 months, between when an SG shortfall arises (that is, the due date for when an employer should have paid their employee's superannuation) and when the employee lodges an EN complaint. This means that by the time the ATO begins an investigation into unpaid SG, more than 2 years may have elapsed from the time that the shortfall first arose.
- Until very recently, there has been comparatively little ATO proactive work to identify potential SG non-compliance due to a combination of resourcing, availability of relevant data and the Commissioner's commitment to investigate every EN complaint. Proactive compliance work was confined to the ATO conducting SG audits as part of their high risk PAYG(W) and employer obligation audits. However, from 1 July 2009 the ATO has sought to use data matching to identify high risk employers for proactive audit although there are significant limitations on the ATO being able to undertake real-time monitoring and rapid follow-up of high risk employers.
- Employees are still heavily reliant on annual reporting from superannuation funds for information whether superannuation contributions were actually made. In addition, employees may not know from their payslips whether an employer has actually paid their SG. This has the effect of increasing the timeframe between SG non-payment and the ATO's detection through employees lodging EN complaints.
- A significant proportion of SG compliance risk and collectable debt is associated with micro-business and, to a lesser extent, the lower end of the SME segment, For instance, nearly 87 per cent of SGC raised related to micro-business and the lower end of the SME segment while 95 per cent of SGC collectable debt was associated with micro-business and SME employers.
- Fieldwork indicates that about 30 per cent of debt recovery cases lead to the non-recovery of the SGC debt because the employer is insolvent or it is uneconomical to pursue the debt. In a further 30 per cent of cases the employer has paid the SGC debt as a result of ATO debt recovery action with the remaining cases still subject to debt collection activities.
- Where a default assessment is raised (that is, the employer has not voluntarily lodged a SGC Statement even after an audit is initiated), then it is twice more likely that a SGC debt will be outstanding one year after the date of issue than where an employer lodges a SGC Statement. In addition, where a default assessment is raised, then it is six times more likely that a SGC debt will be written-off than where an employer lodges a SGC Statement during an audit.
- Where an employer has entered into liquidation, the current SG system has not adequately protected unpaid SG entitlements. By law, the ATO is not able to recover unpaid SGC against the directors personally and employees have not been able to recover under the General Employee Entitlements and Redundancy Scheme (GEERS) suggesting that employees' superannuation is anything but 'guaranteed'.
2.7 The non-payment of SG impacts a number of persons including the affected employees, other businesses and government. Affected employees miss out on superannuation which has an impact upon their standards of living in retirement. Employers that do not pay SG obtain an unfair advantage over other compliant employers that meet their SG obligations and pay employees' superannuation on time. Finally, government is exposed to higher future age pension outlays.
2.8 There are also significant limitations on the ATO being able to undertake real-time monitoring and rapid follow-up of high-risk employers with the current information flows in the SG system. Without auditing individual employers, the ATO is not able to effectively and efficiently reconcile liabilities and payments in real time to proactively determine whether there has been potential non-compliance and undertake prompt follow-up action. This arises because:
- Superannuation funds provide information to the ATO (through the lodgement of Member Contribution Statements (MCS)) only annually and this information may not always include the employer's details against payments made to members.
- Employers are required to separately identify to the ATO where they have not met their SG obligations by the due date (through the lodgement of SGC Statements) — but the ATO has no way of knowing (until either it receives an employee complaint or undertakes data-matching of MCS and individuals' income tax returns) that an employer has failed to lodge a SGC Statement and that they have a SG liability.
2.9 A delay in triggering ATO audit activity significantly increases the likelihood of non-payment of SGC debt (requiring more costly debt recovery action) and irrecoverability through insolvency. It also hampers the ATO's and government's efforts to maintain a level playing field amongst employers and ensure that compliant employers do not face a financial disadvantage against non-compliant competitors.
2.10 Up until 2007-08 there were significant ATO delays in commencing and finalising its investigations following employee complaints. Employees also complained that they were not being kept informed of the progress of their complaint.
2.11 Following changes to the law and the government providing additional funding, the ATO has taken a number of positive steps to improve its responsiveness to employee complaints:
- It has reduced the backlog of EN complaints to 5,486 at the end of June 2009, although it has not reached its target of 5,000 cases on hand due the high volume of EN complaints received in the last two years.
- It has made significant progress in reducing the timeframes for actioning EN complaints. In 2005-06 only 38 per cent of EN complaint investigations were finalised within 12 months, while in 2008-09 the ATO achieved a 99 per cent finalisation rate.
- It has introduced processes based largely on sending letters to employees at defined times during the audit and debt collection process to ensure that employees are kept informed of the progress of their EN complaint.
2.12 The current penalty and prosecution regimes, and the ATO's administration of these regimes, do not have either a sufficient deterrence or behavioural effect on those who do not lodge a SGC Statement or on employers that do not make SG payments at all. For instance, Part 7 penalties for the non-lodgement of SGC Statements are remitted to nil even where a SGC Statement was lodged more than two years after the due date and after an EN complaint is lodged with the ATO.
2.13 There is significant scope to improve the integrity and equity of the SG system and its administration so as to maximise SG compliance and maintain a level playing field amongst employers. There are a range of recommendations to improve the SG system and its administration in order to:
- Minimise the time period between the non-payment of an SG entitlement and the ATO's awareness of it (either being triggered by an EN complaint or the ATO's own proactive work) — Recommendations 2 and 4.
- Improve the ATO's ability to proactively identify high-risk cases and trigger a compliance response where no employee complaint has been made — Recommendations 1 and 3.
- Improve aspects of the ATO's compliance and debt collection processes — Recommendations 5, 6, 7, 8 and 12.
- Improve the deterrence or penalty effect on those who do not lodge SGC Statements and the delayed or non-payment of SG entitlements — Recommendations 9 and 10.
- Better protection of SG entitlements where an employer becomes insolvent — Recommendation 11.
2.14 In framing the recommendations below the IGT sought to ensure that the administrative framework better supported the underlying SG policy intent and optimised SG compliance through greater detection and deterrence mechanisms. The recommendations emphasise the nature of employer superannuation contributions as an employee entitlement and seek to improve their protection, especially for the least empowered employees. At the same time, the administration of the SG should seek to minimise employer compliance costs and provide adequate education and support for employers that comply.
Given the identified barriers to quantifying the level of non-compliance, to better detect SG non-compliance the ATO should determine the current and accessible information and data required for a more sophisticated analysis of the SG population so as ascertain a more complete picture in relation to the level of non-compliance and its impact on employees.
This should include the collection and analysis of data (including additional information that may be captured and available to the ATO in the future in line with Recommendation 3) to estimate the amount of money involved with SG non-compliance, the percentage of non-compliant employers and affected employees across market segments and the quantum of the salary sacrifice component.
We understand this recommendation is for the Commissioner to use all readily available data and information (including reportable employer superannuation contributions data available from next financial year) to ascertain a fuller picture of SG compliance levels in various markets and industries. We will be initiating a project in the 2010/11 financial year in order to establish the parameters to complete this work. However, we will not be conducting random audits or surveys as we believe this places an unfair burden on compliant taxpayers and is not an efficient use of our resources.
Our ability to undertake the analysis envisaged in the second paragraph of this recommendation is contingent on Recommendation 3 being legislated and implemented.
The Government consider providing employees with more timely information regarding whether their employer has paid SG by the due date, by having employers, on a quarterly basis, include on each employee's payslip their ordinary time earnings for SG purposes and the amount of SG actually paid to the employee's superannuation fund or the ATO. This will also assist in reducing the timeframe between when a SG shortfall arises and when an employee lodges an EN complaint with the ATO.
This is a policy matter for Government's consideration.
The Government consider improving the current payment and information systems for SG obligations to allow the ATO to undertake more real-time monitoring and rapid follow-up of high-risk employers, particularly micro-businesses.
The payment and information systems should have the following features:
- Capturing the following details for each employee: name, tax file number, ordinary time earnings, amount of superannuation contribution paid by employer, superannuation fund and member number;
- ATO to have access to this data on a quarterly basis; and
- Compulsory requirement for all employers in high-risk segments to participate in the system rather than it being optional.
In a manner that minimises compliance obligations, the ATO should also engage superannuation funds and clearing houses to obtain information for the purposes of identifying potential SG non-compliance.
This is largely a policy matter for Government's consideration.
In relation to that part of the recommendation directed to the ATO, made in the last paragraph, we agree with the recommendation.
The ATO encourages people in the superannuation industry and others to provide information on employers at risk of non compliance with their SG obligations. This is done by encouraging representative bodies, through industry forums, etc, to utilise our 'third party referral' process.
The ATO is also one of the stakeholders involved in the consultation process undertaken by Medicare on their administration of the Clearing House initiative. Once appropriate legislation has passed we will explore with Medicare the feasibility for information sharing between the two agencies.
To minimise the timeframe between SG non-compliance and the ATO's detection, the ATO should significantly expand its proactive SG audit work to allow for more real-time monitoring and rapid follow-up of high-risk employers, especially in the micro-business segment, who have not paid superannuation. This should include:
- Increased reliance on data-matching approaches; and
- Increased community presence through more targeted field work along the lines of the FWO campaigns.
This also requires the ATO to further develop its risk identification strategies to more effectively detect the different types of SG non-compliance as each requires different analysis techniques and detection mechanisms.
The ATO already uses data matching techniques to identify employers at risk of non compliance and will be able to do this with even more precision with the availability of Reportable Employer Superannuation Contributions data.
The ATO already targets high risk industries and employers. Approximately 95 per cent of our proactive audits are in the micro segment.
The ATO already has a high percentage of its proactive audit resources in field activities. Any further increase would have to be carefully considered due to the high costs of each field activity compared to a phone or desk audit.
The ATO is committed to addressing all employee SG complaints in a timely way and this necessarily constrains the resources available for proactive work. Nevertheless, 27 per cent of our compliance resources working on SG are doing proactive risk-based work.
Having regard to the overall level of risk in the SG system, and the range of other tax and superannuation risks that the ATO is required to address, we believe that the current level of resources allocated to addressing SG risks is appropriate.
To improve the employee experience of ATO communications in relation to its investigation of EN complaints, the ATO should improve its communications by ensuring that:
- Employees receive appropriate and personalised letters in a timely manner that set out the following details:
- SGC liabilities raised by the ATO on behalf of employees following an investigation;
- SGC amounts collected by the ATO; and
- Where the ATO has not been able to collect, the reasons for non-collection (for example, insolvent employer, uneconomical to pursue) and the amount written-off.
- Auditors correctly complete the case management system so as to allow ATO officers to appropriately respond to employee requests for updates on ATO action.
We accept auditors should correctly complete case management systems and have already taken steps to minimise the likelihood of errors. We also write to employees who make complaints advising when an amount is collected on their behalf and the amount.
We are currently reviewing the whole framework of our letters to further improve our communication with employees.
However, the dissemination of information to employees must be reviewed in the context of:
- what the SG legislation allows us to disclose;
- what is sensible to provide given the substantial reverse workflows that can arise when amounts originally raised change, for example where the employer successfully objects to the amount owing or amends the SG assessment; and
- what our current systems and resources will allow us to change.
We will consider the IGT's recommendation as part of our review of SG letters to employees who lodge complaints. This review of letters is a part of our SG End to End Review. The second stage of this project is expected to be finalised within 12 months. At this time more information regarding our system capabilities will be available.
To improve transparency of the time taken for the ATO to complete its compliance action in response to employee notifications, the ATO should also measure its performance with the 4-month and 12-month completion timeframes from the date that an employee lodges a valid complaint with the ATO.
We understand this recommendation proposes the ATO to measure its performance with the 4-month and 12-month completion timeframes from the date an employee lodges a valid and complete complaint with the ATO. We classify a complaint to be valid and complete when all the required information necessary to commence compliance action is provided by the employee.
We will implement these new performance standards in the 2010/11 financial year.
To ensure continuous improvement of the EN complaints process, the ATO should measure the time it takes for an employee to receive their SG entitlement from the time that they lodge an EN complaint.
Equally, the ATO should record and analyse the outcome of all debt recovery cases arising from EN complaints to measure the effectiveness of the EN complaints process.
Agree, subject to our system's capability.
Our current systems are unable to track in full the path of an EN complaint. Our ability to fully implement this recommendation is contingent on the implementation of SG systems into the new enterprise platforms, which is not expected to occur within the next 12 months.
As a means to better measure performance around SG administration and increasing transparency, the ATO should report on the following:
- the number of SG complaints leading to an SGC liability being raised and those leading to no result;
- the total number of employees whose superannuation entitlements are checked and the number of employers whose records are checked;
- the percentage of superannuation complaints resolved in accordance with the service standards; and
- the total amount and basis for SGC written-off.
Agree, subject to the data being readily available from our systems.
We note that some of this information is already reported, but we will seek to fully implement this additional performance reporting in respect of 2009/10 outcomes.
The Government consider whether the current multi-faceted and complex penalty system applying to SG (such as non-deductibility of SGC, the application of nominal interest and the administrative component from the beginning of each quarter and Part 7 penalties) should be streamlined and better targeted to improve voluntary compliance.
To bolster the Part 7 penalty regime as part of an effective deterrent against non-payment of SG entitlements, and give greater importance to the lodgement of SGC Statements, the ATO should revise its policy and administration of the penalty regime to ensure it strikes an appropriate balance between:
- Discouraging the non-lodgement of SGC Statements by imposing penalties at a more meaningful level; and
- Recognising the need for appropriate remission in circumstances where the non-lodgement was due to circumstances outside the employer's control.
The ATO should seek to more widely publicise the outcomes of its application of Part 7 penalties to deter non-compliant behaviour but in a way that protects taxpayer secrecy.
This recommendation is largely a policy matter for Government's consideration.
For the part directed at the ATO we agree to the recommendation, but note the following information:
- The ATO is currently reviewing its administration of Part 7 penalty. This review will look at the guide for audit officers for remission of penalties, and consider the imposition of penalties on employers who continuously lodge SGC Statements late.
- The SGC already incorporates significant financial disincentives, such as nominal interest from the beginning of the relevant quarter, administration charges and loss of tax deductions. Any increase in imposition of Part 7 penalties must be finely balanced to ensure we are not overly penalising or imposing an unreasonable burden on otherwise viable employers.
- We will also consider suitable communication activities regarding publicising the outcomes of the application of penalties.
To bolster SG prosecution action as part of an effective deterrent against non-payment of SG entitlements the Government consider whether the ATO should be afforded greater prosecution powers (such as the ability to seek the imposition of civil pecuniary penalties) where an employer does not pay SG and fails to cooperate with the ATO.
In the event that the ATO is given greater prosecution powers, the ATO should implement a media strategy that is designed to maximise the compliance leverage effect by raising the coverage and profile of SG prosecution cases.
Notwithstanding being granted these further powers, the ATO should adopt a stronger prosecution strategy for the more egregious and high-risk employers and should also finalise and publicly release its revised SG prosecution strategy and implementation plan.
This recommendation is largely a policy matter for Government's consideration.
Should the Government proceed with providing us the recommended prosecution powers we will then undertake to review our media strategy on prosecutions in light of the legislative changes and operational results.
For the part of this recommendation directed at the ATO, we are currently reviewing our SG prosecution strategy and agree to publish the key elements of this strategy once the review is complete.
To better protect employees' SG entitlements, improve deterrence against SG non-compliance and provide greater transparency of the cost of SG non-compliance on future age pension outlays, the Government consider:
- Expanding the director penalty regime to apply to unpaid SGC liabilities of the company; and
- Expanding GEERS to cover unpaid SGC liabilities where a company has been placed into liquidation and the ATO has not been able to recover against the directors personally.
This is a policy matter for Government's consideration.
To minimise SGC debt defaulters, the ATO should improve its risk identification techniques to better target high-risk employers with firmer action sooner. For instance, the ATO's debt collection processes should place greater emphasis on employers' previous compliance behaviour in determining how a debt case is actioned.
Where an employer has defaulted in their payment arrangement, the ATO should require further information regarding the employer's financial and compliance position before entering into further payment arrangements.
We have already implemented most parts of this recommendation. Recent changes to superannuation debt collection activities include:
- reducing the average handling time of cases;
- ensuring staff place a greater emphasis on the compliance history of the employer;
- referring debt for legal action in a timelier manner; and
- obtaining additional financial information (not previously recorded) in default arrangement cases.
We are currently exploring options to further improve our case risk assessment and differentiated approach to SGC debt collection.
1 Australian Prudential Regulation Authority (APRA), Annual Superannuation Bulletin, June 2009 (issued 10 February 2010).