3.1 This chapter sets out a brief description of the development of employer superannuation contributions, the purpose of the SG system and the operation of the SGC. It also describes the ATO's current management approaches regarding SG.
Development of employer superannuation contributions
3.2 Historically, institutionalised employee superannuation began in September 1985 when the Australian Council of Trade Unions (ACTU), as part of its National Wage Case claim with the Conciliation and Arbitration Commission, sought a 3 per cent employer superannuation contribution to be paid into an industry fund. The government supported the claim in pursuit of its inflation control objectives and, in February 1986, the Commission announced that it would approve industrial agreements that provided for contributions of up to 3 per cent to approved superannuation funds.2
3.3 Compliance problems associated with award superannuation prompted the Industrial Relations Commission in 1991 to reject an application, supported by both the ACTU and the Government, for a further 3 per cent of salary in award superannuation.
3.4 In 1992, a government desire to introduce a further 3 per cent of salary in award superannuation led to the introduction of the SG system, with the aim of ensuring that as many Australians as possible have access to superannuation and to provide higher standards of living in retirement for future generations.
3.5 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.
Purpose of the SG system
3.6 The SG system is one component of Australia's retirement income policy and complements the age pension and voluntary superannuation contributions.
3.7 It is a mechanism for increasing national savings and retirement income by employer superannuation support and, as a consequence, increasing the proportion of self-funded retirees. Over time, SG is intended to reduce the need for future generations of taxpayers to pay extra 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.
3.8 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.
Operation of the Superannuation Guarantee Charge
3.9 The Superannuation Guarantee (Administration) Act 1992 (SGAA) and the Superannuation Guarantee Charge Act 1992 set the legislative framework for the SG system.
3.10 The SG system, administered by the ATO, requires employers to self-assess their liability to the SGC, and make payment of the charge, if any, by the due date. There is no requirement for employers to report to the ATO or lodge SGC Statements so long as they provide sufficient superannuation support for all eligible employees.
Application of SG system
3.11 The SG system applies to all employers in respect of their full-time, part-time and casual employees, with only limited exemptions. The terms 'employer' and 'employee' have their ordinary common law meanings, but are also extended to include other persons who may not otherwise come within the terms. For instance, a person may also be an employee for SG purposes if they are engaged under a contract that is wholly or principally for labour even if an Australian Business Number (ABN) is quoted.
3.12 Superannuation Guarantee Ruling SGR 2005/1 explains when an individual is considered to be an 'employee' and discusses the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term.
3.13 SGR 2005/1 outlines which persons are employees under the extended definition and also considers the circumstances in which an individual who may otherwise be an employee is specifically exempted from the scope of the SGAA.
3.14 It also provides the ATO view on the implications of the alienation of personal services income measures for deciding whether an individual is an employee within the meaning of the SGAA. SGR 2005/1 further considers whether an individual who holds an ABN can be an employee for the purposes of the SGAA. The Ruling also discusses arrangements or relationships that do not give rise to an employer/employee relationship.
3.15 If an individual is not an employee as defined in the SGAA or is an employee but is otherwise exempted from the application of the SGAA by a specific provision, no liability for the SGC will arise.
3.16 Employers are required to make superannuation contributions into a complying superannuation fund or retirement savings account for the benefit of their eligible employees in accordance with minimum prescribed levels, which is currently 9 per cent of an employee's ordinary time earnings (OTE).
3.17 Contributions by an employer that may be counted for SG purposes are:
- compulsory contributions made under an award, an industrial law or the SGAA;
- additional voluntary contributions; and
- employer contributions after an employee enters into an effective salary sacrifice arrangement.
3.18 This means that amounts salary sacrificed by an employee may satisfy an employer's obligations under the SGAA. If the salary sacrificed superannuation contribution is more than the SG amount an employer is required to pay, then the employer would not be required to pay an additional amount on top of the salary sacrificed amount. However, salary sacrifice amounts may not reduce the employer's obligation to pay superannuation where the terms of an award or agreement require an employer to pay a certain amount of superannuation for an employee or may require superannuation to be paid on the employee's pre-sacrifice salary.
3.19 In evidence to the IGT, stakeholders noted the growing number of lower to middle income employees that were entering into salary sacrifice arrangements for superannuation. There is a risk that many may suffer unintended financial detriment given the complexity around these arrangements especially as many may believe that their employer superannuation contributions are additional to their salary and wages. Given the potential impact on employees, this issue will no doubt be considered by the Review into the governance, efficiency and structure and operation of Australia's superannuation system (otherwise known as the Cooper Review).
3.20 If an employer does not provide the minimum level of contributions in respect of their eligible employees by the prescribed dates, the employer will be liable to pay the SGC and must lodge a SGC Statement with the ATO.
3.21 Although the level of superannuation support required to be provided by an employer is calculated as a percentage of ordinary time earnings, the liability for the SGC is calculated with reference to an employee's 'salary or wages'. The individual SG shortfall for an employee is calculated to be 9 per cent of the total salary or wages paid by the employer to the employee for the quarter.
Timing of contributions
3.22 Initially employer superannuation contributions were required to be paid annually in arrears. However, from 1 July 2003 contributions were required to be made on a quarterly basis, as was the requirement to lodge a SGC Statement where the employer was liable to pay the SGC.
|Quarter||Due date to make contribution||Due date to lodge SGC Statement|
|1 July — 30 September||28 October||14 November|
|1 October — 31 December||28 January||14 February|
|1 January — 31 March||28 April||14 May|
|1 April — 30 June||28 July||14 August|
3.23 This change was to benefit employees in two main ways — employer contributions could be invested sooner and the incidence of unpaid employer contributions as a result of employer insolvency would be likely to be lower.
Earnings base for SG purposes
Ordinary time earnings
3.24 From 1 July 2008, the amount against which an employer is required to calculate the contributions necessary to satisfy their superannuation obligations in respect of their eligible employees was been standardised to Ordinary Times Earnings (OTE).3
3.25 Superannuation Guarantee Ruling SGR 2009/2 outlines the ATO view on the meaning of the terms OTE and 'salary or wages' for the purposes of the SGAA.
3.26 OTE, for SG purposes, is the total of the employee's earnings for ordinary hours of work, over-award payments, shift loading and commission. Payments for work performed during hours outside an employee's ordinary hours of work (such as overtime) are not OTE.
3.27 Specifically excluded by the SGAA from being OTE include a payment in lieu of unused sick leave or an unused annual leave or long service leave payment made to the employee on termination of employment — although these amounts are not necessarily excluded from being 'salary or wages'.
3.28 Where an employer and employee enter into an effective salary sacrifice arrangement, this also has the effect of reducing an employee's OTE and the amount of SG an employer is required to pay.
3.29 The total of OTE in respect of an employee for a quarter cannot exceed the maximum contribution base for the quarter — for any quarter in the 2008-09 year, the maximum contribution base was $38,180.
3.30 Paragraphs 27 to 46 of SGR 2009/2 provide further detail on the OTE classification of specific kinds of payments such as allowances and loadings, bonuses, paid leave and holiday pay.
Salary and wages
3.31 Under the SGAA, salary and wages are generally any periodical payment made to a person in return for work or services and includes:
- directors fees;
- payments under a contract in respect of the labour of the person; and
- remuneration of a member of the Parliament of the Commonwealth or a State or the Legislative Assembly of a Territory; and
- specific payments to a person and remuneration of a person referred to in the SGAA, with further information on these payments set out in paragraphs 51 to 56 of SGR 2009/2.
3.32 Certain payments are specifically excluded from being salary or wages such as payments to people employed for not more than 30 hours per week in work that is wholly or principally of a domestic or private nature and fringe benefits.
3.33 In addition, the SGAA specifies salary or wages that are not to be taken into account for the purposes of calculating an individual SG shortfall, such as:
- salary or wages paid to an employee who is 70 years of age or over;
- salary or wages paid to a non-resident employee for work done outside Australia;
- salary or wages paid by a non-resident employer to a resident employee for work done outside Australia;
- salary or wages of less than $450 paid to an employee in a month;
- salary or wages paid to a part-time employee who is under 18 years of age;
- pay and allowances for members of the Australian Defence Reserve Forces for service other than continuous full-time service; and
- other salary and wages prescribed by the SGAA or paid to an employee who is a prescribed employee.
3.34 Paragraphs 64 to 76 of SGR 2009/2 provide further detail on the salary and wages classification of specific kinds of payments such as allowances, bonuses, leave payments, expense allowances and reimbursements, redundancy payments and workers' compensation payments.
Superannuation Guarantee Charge
3.35 The SGC is composed of three parts:
- the total of an employer's individual SG shortfalls;
- the interest component; and
- the administrative component.
3.36 The nominal interest component for a quarter is a substitute for fund earnings that would have accrued if the employer had provided the prescribed minimum SG support during the quarter. This component is calculated by multiplying the total of the employer's individual SG shortfalls for the quarter by the interest rate of 10 per cent per annum. Interest is calculated on the employer's quarterly shortfall amount from the first day of the relevant quarter to the date on which the SGC is payable or the SGC Statement is lodged, whichever is later.
3.37 The SG shortfall and the interest component of the SGC are distributed by the ATO for the benefit of those employees in respect of whom the charge was paid.
3.38 The administrative component for a quarter is part of the ATO's cost of collecting and distributing the SGC back to individual employees and is $20 for each employee for whom there is an SG shortfall.
3.39 The disadvantages involved in not making the minimum superannuation contributions on time are:
- The SGC is not deductible whereas the superannuation contribution may have been.
- The employer is liable to pay an administrative fee and interest from the start of the relevant quarter rather than from the date the contributions should have been made.
- Salary and wages being the basis of calculation of the SGC, rather than ordinary time earnings.
3.40 These aspects of the SGC apply automatically and, subject to the late payment offset provisions, apply even if the contributions are made shortly after the due date.
Late payment offset
3.41 Previously, where an employer failed to meet its SG obligations by the due date, and subsequently paid the relevant contributions to a complying superannuation fund or retirement savings account, a double payment problem may have occurred. An SGC liability still arose, which included the full amount of any shortfall, even though contributions relating to the relevant period had subsequently been paid into an employee's superannuation fund or retirement savings account by the employer. The introduction of the late payment offset rule has had a significant impact in mitigating the double payment problem and reducing the number of employer complaints.
3.42 From 26 March 2009, an employer can offset late contributions against SGC liability for a quarter for an employee if:
- the contribution is made into an employee's complying superannuation fund after the 28th day after the end of the quarter (it is a late payment);
- the employer elects in the approved form that the contribution be offset against their SGC for the quarter for the employee;
- the contribution is made before the employer's original assessment for the quarter is made; and
- the election is made within four years after the employer's original assessment for the quarter is made.
3.43 An employer's original assessment for a quarter is made at the earlier of:
- the day the Commissioner receives a SGC Statement from the employer for the quarter, where the employer has not previously lodged a SGC Statement for that quarter and the Commissioner has not assessed a SGC for the employer for that quarter; and
- the day the Commissioner makes a default assessment for the employer for the quarter.
3.44 An employer can only use late contributions to offset the nominal interest and SG shortfall components of the super guarantee charge and will not be able to offset the administration fee, or other interest or penalties. Also, penalties for failing to provide statements and information apply to the full amount of the SGC without the effect of the late payment offset.
3.45 If an employer elects to offset the late payment against their SGC liability, then:
- the late payment is not tax deductible for income tax purposes;
- the election to use a contribution as an offset cannot be revoked; and
- any late contribution used to reduce the amount of an employer's SGC cannot be used as a pre-payment for current or future periods.
Choice of funds
3.46 From 1 July 2005 employers were required to offer choice of superannuation funds to eligible employees. An employer must:
- give employees the option to choose the superannuation fund that receives the SG contributions;
- action employees' valid choice nominations within two months;
- pay contributions to a fund that meets the choice requirements; and
- not charge employees a fee for making contributions to a superannuation fund.
3.47 The choice liability applies where an employer has paid SG contributions to a complying fund for employees but not to the fund chosen by them or where the employer has not given employees a standard choice form in the required timeframe. The choice liability is 25 per cent of the contributions that are paid into the superannuation fund although there is a $500 cap on the amount of choice liability for an employee. There may be a cap for either a particular quarter, or a notice period, which can consist of multiple quarters.
SGC Statements and assessments
3.48 The SGAA requires that an employer who has a shortfall must lodge a SGC Statement for the quarter.
3.49 The information that must be provided in the SGC Statement includes:
- the name, postal address and tax file number of each employee for whom the employer had an individual SG shortfall for the quarter;
- the amount of each such shortfall;
- the employer's nominal interest component for the quarter;
- the employer's administration component for the quarter;
- the total of the employer's individual SG shortfalls for the quarter; and
- the amount of the employer's SGC for the quarter.
3.50 The SGAA provides that where an employer lodges a SGC Statement for a quarter (and no previous statement for that quarter had been lodged and no previous assessment raised), then the Commissioner will be taken to have made an assessment of the employer's SG shortfall for quarter and of the SGC payable on the shortfall as specified in the statement.
3.51 If an employer has not lodged a SGC Statement for a quarter, and the Commissioner is of the opinion that the employer is liable to pay SGC for the quarter, then the Commissioner may make a default assessment of the employer's SGC payable.
When SGC becomes payable
3.52 Where an employer lodges a SGC Statement on or before the lodgement day for the quarter, then the SGC is payable on the lodgement day. Where an employer lodges a SGC Statement after the lodgement day of the quarter, then the SGC is payable on the day on which the statement was lodged. If the ATO issues a default assessment for a quarter, then the SGC is payable on the day the assessment was made.
3.53 Additional SGC, which may be imposed under Part 7 of the SGAA for failing to provide a SGC Statement or information, becomes payable on the date specified in the notice of assessment of the additional charge.
3.54 If the SGC (including the additional SGC) is not paid, or is not paid in full, by the due date for payment, the employer must pay the general interest charge (GIC) on the unpaid amount.
3.55 The GIC is worked out daily on a compounding basis and is imposed on the unpaid amount of the SGC (excluding the nominal interest and administration components) from the beginning of the day by which the SGC was due to be paid to the end of the last day on which any SGC or GIC on the SGC remains unpaid.
3.56 The Commissioner may remit all or part of the GIC, but only where special circumstances make that action fair and reasonable.
3.57 The shortfall component, any GIC in respect of non-payment of the SG shortfall and the nominal interest component of the SGC represent a debt to the employee. The administration component, any SGC penalty debts and any GIC relating to the late payment of Part 7 penalties represent debts to the Commonwealth.
Order of payments
3.58 The SGAA requires the Commissioner to apply payments of the SGC so that the employer's liability to pay the nominal interest component is discharged before all other amounts.
3.59 Chapter 7 of the ATO Receivables Policy sets out in greater detail the priority of allocation in respect of a SGC liability. The ATO states that the order of allocation for quarterly debts reflects the clear intention to prioritise payment of employee entitlements ahead of monies due to consolidated revenue.
3.60 Payments received for a quarterly SGC liability (relating to periods after 1 July 2003) will be credited towards the earliest debt in the following the order:
|Order of allocation||Payment|
|1||Nominal interest component||Employee entitlement|
|2||GIC for the unpaid total of the individual SG shortfall|
|3||Total of the individual SG shortfall|
|4||Administrative component||ATO entitlement|
|5||GIC for the unpaid Part 7 penalty charges|
|6||Part 7 penalty charges|
3.61 The SGC (including any related penalties and GIC) payable by an employer is classified as a tax-related liability. It represents a debt due to the Commonwealth which the Commissioner may collect and recover. The Commissioner has authority to sue in a court of competent jurisdiction to recover an amount of SGC that remains unpaid after it has become due and payable.
3.62 The methods by which the Commissioner may collect and recover amounts of SGC are similar to other taxes and liabilities. This includes the power to defer the payment time, to permit payments by instalments and to recover from third parties (by issuing a garnishee notice). The Commissioner is also able to take formal legal action to recover the SGC, including the liquidation of companies or the bankruptcy of individuals.
3.63 Importantly, and unlike the treatment of amounts withheld under the pay as you go withholding system, the Commissioner is not able to taking action to recover unpaid SGC against directors of companies personally.
3.64 On 6 November 2009, the Government announced that a free superannuation clearing house service, previously announced in the 2008-09 Federal Budget, will be delivered by Medicare Australia. The service will be available from 1 July 2010 for small businesses with less than 20 employees.
3.65 For the 2009-10 financial year and all future years, reportable employer superannuation contributions made for an employee must be reported on the employee's payment summaries. Reportable employer super contributions are those contributions an employer makes on behalf of an employee where all of the following apply:
- the employee influences the rate or amount of superannuation contributed on their behalf; and
- the contributions are additional to the compulsory contributions an employer must make under any of the following:
- the superannuation guarantee law;
- an industrial agreement;
- the trust deed or governing rules of a superannuation fund; or
- a federal, state or territory law.
3.66 Reportable employer superannuation contributions are not taken into account in calculating the employee's income tax liability for the year, but are taken into account in determining entitlement to certain tax concessions and social security benefits or liability to make certain payments.
3.67 The Australian Prudential Regulation Authority (APRA) statistics show that in 2008-09 superannuation contributions totalled $112.2 billion. Employers contributed $71.1 billion and members contributed $39.9 billion. Other contributions, which include spouse contributions and government co-contributions, totalled $1.1 billion.
3.68 It is evident from Table 3.3 that both employer and member contributions have grown strongly in the last seven years. The IGT notes that the employer contribution amount includes both mandated SG contributions and salary sacrifice amounts and a break-up of these amounts is not available from the APRA statistics.
Source: APRA Annual Superannuation Bulletin 2009 (issued 10 February 2010)
3.69 The APRA statistics also show that in June 2009 there were 415,252 separate superannuation funds in Australia with a total of 32 million superannuation account members, with self-managed superannuation funds accounting for 98 per cent of all superannuation funds.
|Self-managed super funds||410,318||722||332.3||430.3|
Source: Source: APRA Annual Superannuation Bulletin 2009 (issued 10 February 2010)
Note: Small includes self-managed superannuation funds and small APRA funds. A break-up into employer, member and other contributions for self-managed superannuation funds and small APRA funds was not available.
3.70 While the quantum of employer contributions was fairly similar across different fund types, it is evident that the average employer contribution amount was significantly higher in small funds than all other funds. One reason for this may be the higher propensity for employees with self-managed super funds to salary sacrifice into their own super fund.
3.71 In turn, corporate and public sector funds had higher average employer contribution amounts when compared to industry and retail funds.
|Small and other funds||11,141||14,301||24,152||31,003||5|
|Self-managed super funds||NA||NA||NA||NA||NA|
ATO Management of SG
3.72 The administration of SGC is managed mainly through the Superannuation business line, which is responsible for investigating employee complaints and undertaking audit activity, and the Operations business line, which is responsible for debt recovery activity.
3.73 A key priority of the Superannuation Line Plan 2009-10 is to ensure that employers meet their superannuation obligations, including the payment of superannuation entitlements and offering choice of super fund. The Plan notes that SG compliance is a strategic risk for the ATO and that if voluntary employer compliance with their SG obligations declines then it will result in lower retirement savings and loss of community confidence.
3.74 The ATO employs a range of tactics to ensure the delivery of this priority:
- Undertaking targeted communication and marketing activities to support employers in meeting their SG obligations — delivered through Communications, Projects and Liaison.
- Conducting audits and reviews via outbound calls, desk audits and field visits on all SG Employee Notifications received within the agreed timeframes to ensure employers have met their SG obligations and keep employees informed on the progress of their complaint — delivered through Active Compliance.
- Conducting audits via outbound calls, desk audits and field visits to follow up employers who hold tax file numbers of employees but fail to provide these to superannuation funds — delivered through Active Compliance.
- Conducting audits via outbound calls, desk audits and field visits on third party referrals and industries or employers identified as high risk according to ATO intelligence, risk identification and risk assessment processes to enforce SG obligations — delivered through Active Compliance and Employers Segment.
- Support employers in meeting their SG obligations - delivered through the provision of publications, enquiry services, website materials, on-line tools and calculators.
3.75 End-to-end issues in the identification, enforcement and recovery of SG spanning different business lines are managed through the SG Product Forum.
3.76 In 2008-09, the Superannuation business line had a total of 994 Full Time Equivalent (FTE) staff, with 385 FTE working on SG (down from 441 FTE in 2007-08). In addition, there were a further 570 FTE working on SG (predominantly in the debt collection area) from a total of 2,513 FTE that work on all superannuation products, including SG. This means that approximately 38 per cent of the ATO's superannuation budget is allocated to the administration of SG.
2 APRA Insight publication, Celebrating 10 years of superannuation data collection 1996-2006.
3 Previously employers used a 'notional earnings base' for this purpose.