4.1 During this review, the IGT received submissions and evidence relating to the ATO's approach in addressing employer non-compliance. In particular, employees, superannuation funds and industry groups expressed concern with the action taken by the ATO to identify and pursue employers who have defaulted on their SG obligations.
4.2 This chapter examines the types and level of non-compliance, the ATO's SG compliance approaches and results, interactions and information flow amongst key stakeholders in the SG system.
Types of non-compliance
4.3 The IGT has identified three different categories of SG non-compliance:
- Where the employer is non-compliant with their SG obligations but the employee is compliant with their tax obligations and lodges an income tax return.
- Where the employer is non-compliant with their SG obligations and the employee is also non-compliant with their tax obligations by failing to declare salary and wages — this is predominantly found in the cash economy.
- Where a person is incorrectly categorised as a contractor, rather than an employee so as to avoid a range of employer obligations including SG payment.
4.4 Each of the above categories requires different analysis techniques and detection mechanisms. For instance, the first category requires the ATO to detect instances where a taxpayer reports salary and wages but the employer fails to make any superannuation contributions and also fails to lodge a SGC Statement. The second category requires more intensive investigation and audit activity as the ATO does not always have the requisite information — however, following up on an employer's SG non-compliance would also involve addressing the employee's non-compliance with their income tax obligations. Finally, the third category requires the ATO to assess the employment conditions so as to determine whether the relevant person is an employee or a contractor.
4.5 The ATO advises that it addresses the first category of non-compliance by actioning EN complaints and proactive work identified through data matching. The second and third categories of non-compliance are being addressed by the level playing field project and the third party referral process. Employers working in the cash economy are referred to the appropriate specialised teams for further investigation.
Level of non-compliance
4.6 The ACTU in their submission to this review stated that there was limited public information on the extent of employer non-compliance with their SG obligations. However, the ACTU estimated that:
- more than 500,000 employees are not receiving their full superannuation entitlements (assuming that the average private sector business employs 6 employees, and that there are about 840,000 employing businesses and that 30 per cent of businesses are non-compliant);
- more than $900 million is outstanding in unpaid superannuation entitlements; and
- more than 50,000 employees are working without accruing any superannuation and fewer than 5 per cent of employees who have not received their full superannuation entitlements make a complaint to the ATO.
4.7 The ATO believes that there are very high levels of voluntary compliance by employers with their SG obligations. As evidence of this, the ATO points to the following:
- SGC raised by the ATO is less than 1 per cent of the total superannuation paid by employers to complying superannuation funds.
- APRA reported that employer superannuation contributions in 2007-08 totalled $69.8 billion and ATO data indicates that employer contributions significantly exceeded 9 per cent of total salary and wages. The ATO states that over four years (2003-04 to 2006-07) employment had increased by 8.4 per cent while salary and wages increased by 19.8 per cent and employer superannuation contributions increased by 43.1 per cent.
- The ATO has estimated the salary sacrifice amount at $6.8 billion in 2005-06 suggesting that the bulk of the employer contribution amount relates to mandated SG contributions.
IGT observations and findings
4.8 The IGT found that there were a number of barriers to quantifying the level of non-compliance. It is not currently possible to disaggregate the employer contribution amount into the mandated SG contributions and salary sacrifice components. However, from 2009-10 and onwards the ATO will have information on reportable salary sacrifice contributions and the ATO anticipates that it will be able to ascertain a more accurate level of non-compliance. Incomplete employer details from MCS reports also prevent an estimation of the number of employers and the number of eligible employees across each market segment.
4.9 Equally, the IGT is not convinced that the ATO's macro picture is representative of the true level of compliance, particularly where ATO compliance results indicate increasing SGC liabilities being raised, increasing numbers of employee complaints and the limited available information on the quantum of the salary sacrifice component.
4.10 Likewise, in its 1999/2000 performance audit, the Australian National Audit Office (ANAO) also commented that the ATO's information on employer compliance was not complete. The ANAO recommended that the ATO should collect more data and improve its performance monitoring strategies, relating particularly to the amount of money involved with SG non-compliance, and the percentage of employees affected by employer SG non-compliance.4
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.
SG compliance surveys
4.11 Notwithstanding the absence of information and data to allow a quantitative analysis of the level of SG non-compliance, the IGT noted the results from the ATO's most recent SG compliance surveys.
4.12 Since the introduction of SG in 1992, the ATO has conducted compliance surveys in 1994, 1996, 1998, 1999 and 2000. The key objectives of the survey were to:
- assess compliance with SG, estimate the overall level of compliance and determine if and how the level of compliance has changed over time;
- examine the nature and extent of non-compliance;
- educate employers about SG and thus increase compliance; and
- develop a more detailed understanding of employer's attitudes towards SG.
4.13 The broad parameters of the survey methodology were as follows:
- employers were randomly selected for the audit from ATO database records and the sample was stratified by geographical and payroll criteria;
- employers received a survey questionnaire requesting specific information about the business and its employees — importantly, employers received the survey questionnaire two weeks prior to the deadline for making SG contributions; and
- completion of the survey was compulsory for employers.
4.14 The ATO stopped commissioning these surveys in 2000 as they were showing consistent results from year to year and were imposing a burden on compliant employers. In 2006 the ATO commissioned another SG compliance survey, although with a different focus to the previous surveys. The ATO also made a commitment in 2006 not to undertake these types of surveys in the future as they impose a burden on compliant employers.
The 2000 SG compliance survey (SG 2000)
4.15 The sample size for SG 2000 comprised 927 employers from capital cities with annual payrolls of between $35,000 and $50 million. Unlike previous surveys, the SG 2000 did not include regional employers in the sample and the capital city sample population was significantly lower than previous surveys. The SG 2000 survey had an effective response rate of 79 per cent.
4.16 The key findings of the SG 2000 survey include:
- 72 per cent of capital city employers were fully compliant — this compares to 71 per cent in the two previous surveys and a finding in SG 1998 that only 59 per cent of regional employers were fully compliant.
- 28 per cent of employers were partially compliant.
- Only six of the 727 employers who completed the survey were fully non-compliant (that is, they made no superannuation contributions on behalf of their employees).
- Approximately 10 per cent of eligible employees received insufficient SG support, higher than in previous years, with half of those receiving no superannuation.
- The average level of shortfall in SG contributions identified for each employer was $1,470, with approximately five employees adversely affected per employer.
4.17 In terms of the degree of non-compliance, the SG 2000 survey found that 30 per cent of non-compliant employers displayed a low degree of non-compliance (a small percentage of employees adversely affected and proportionally small amounts under-contributed for those employees). In addition, only 5 per cent of non-compliant employers performed poorly in meeting their SG obligations.
4.18 The SG 2000 survey also found that while a higher percentage of employers were assessed as having received insufficient SG support in SG 2000, the mean under-contributed amount per employee was lower than in SG 1999.
4.19 Table 4.1 sets out the findings for the last three SG compliance surveys.
|SG 1998||SG 1999||SG 2000|
|Total salary and wages||$3,620,161,357||$2,385,829,382||$272,834,589|
|Total earnings base for SG purposes||$3,149,413,865||$2,094,457,539||$237,333,392|
|Total employer contributions||$232,912,191||$177,205,925||N/A|
|Total employer contributions for non-exempt employees||$231,863,931||$171,806,865||$24,337,380|
|Mean contribution shortfall||$1636||$1874||$2,361|
|Mean employee shortfall||$274||$329||$291|
|Number of employees||159,467||108,793||12,288|
|Number of employees excl exempt employees and defined benefit members||141,767||91,703||10,306|
|Number (and percentage) of eligible employees with no or insufficient contributions||11,958 (8.4%)||7,747 (8.4%)||1066 (10.3%)|
|Percentage of all employees with no or insufficient contributions||7.5%||7.1%||8.6%|
|Mean percentage of earning base contributed||7.4%||8.5%||10.3%|
|Mean percentage of salary and wages contributed||6.4%||7.4%||8.9%|
Note: Sample bases: SG 1998 (Capital city sample) — 1695; SG 1999 (Capital city sample) — 2,179; SG 2000 — 727
4.20 The IGT notes that while the mean percentage of earnings and salary and wages increased from SG 1999 (indicating that more employer superannuation was being paid), the percentage of eligible employees with no or insufficient contributions also increased.
4.21 The SG 2000 survey made a number of comments regarding the extent of under-contribution at the employee level. It found that 49 per cent of employees who received insufficient SG support were reported as having had less that 1 per cent of their earning base contributed as superannuation. The respective finding from SG 1999 was that 24 per cent of those employees with insufficient contributions had less than 1 per cent contributed.
4.22 The SG 2000 survey also found that only 35 per cent of employees had contributions within 1 per cent of the required SG contribution rate, a reduction from previous years. In the SG 2000 survey 27 per cent of non-compliant businesses reported that insufficient contributions had been made. A further 13 per cent of non-compliant businesses failed to respond to this question. Thus it is likely that up to 40 per cent of all non-compliant businesses were aware of their non-compliant status (or became aware of this during the course of preparing the audit return).
The 2006 SG compliance survey (SG 2006)
4.23 In order to better understand the incidence of, and reasons for, non-compliance and to inform mitigation strategies to address non-compliance, the ATO commissioned the Superannuation Guarantee Review: 1 April — 30 June 2006 program.
4.24 The audience for this survey comprised micro businesses, SMEs, not-for-profit organisations and government agencies that had been identified by the ATO as being potentially non-compliant.
4.25 The key objectives of the SG 2006 survey were as follows:
- to assess compliance and the reasons for non-compliance among a sample of businesses identified as having a compliance risk;
- to assess the compliance risk for different employee groups; and
- to appraise the utility of three ATO employer risk profiling tools (a data-matching approach, an analytics approach and a hybrid approach).
4.26 The data matching approach comprised businesses that had paid less than 4 per cent superannuation. This was ascertained by matching a range of data sources including member contribution statements, payment summary statements, salary and wages expenses and claimed superannuation deductions. The analytics approach comprised businesses whose 'risk scores' generated from a regression model were above 0.68 (risk scores ranged between 0 and 1, where 0 indicates low probability of non-compliance and 1 indicates high probability of non-compliance). The hybrid approach comprised businesses that had paid less than 2 per cent superannuation and had a risk score greater than 0.5.
4.27 The sample size for analysis comprised 788 employers from an original 1,268 businesses included in the project. Of those 788 employers, 445 were micro-businesses, 245 were SMEs, with a further 83 not-for-profit organisations and only 15 government employers.
4.28 The key findings of the SG 2006 survey included:
- 43 per cent of all businesses were fully compliant, with a further 45 per cent partially compliant with their SG obligations.
- 12 per cent of all businesses were fully non-compliant with their SG obligations, with a higher incidence of full non-compliance among micro businesses (18 per cent) than not-for-profit organisations (7 per cent) and SMEs (4 per cent).
- A higher degree of non-compliance among micro businesses (29 per cent) than SMEs (18 per cent).
- Nearly 60 per cent of all non-compliant businesses said they were aware they were not complying with the most common reasons being cash-flow problems, administrative error, forgetting to pay superannuation and not having all the employee details needed to set up a superannuation account.
4.29 The SG 2006 survey also considered the impact of non-compliance on employees across different market segments, employment category and age group for whom SG was payable during the review period.
4.30 For employers the ATO identified as being potentially non-compliant with their SG obligations, it found that employee segments most at risk of having insufficient SG contributed on their behalf were as follows:
- Employees of micro businesses (compared to other market segments): Over a quarter of employees in micro businesses were assessed as having an average shortfall of about $280 for the quarter (mean figure) which represented on average about 82 per cent of the SG that should have been contributed.
- Contracted and casual employees (compared with full and part time employees): Almost 40 per cent of assessed contract workers were assessed as having a shortfall (mean shortfall $459). Among assessed casual employees, the incidence of under contribution was 30 per cent, with smaller amounts involved but representing about 83 per cent of the amount that was required to be contributed.
- Younger employees: Almost a quarter of the 18 to 25 year old employees assessed in the survey had a shortfall. The nature of the shortfall was similar to that of casual employees with relatively low amounts being involved (mean shortfall $159) but representing a proportionally high level of under contribution (mean 70 per cent).
- Employees who work in the following industry sectors: arts and recreation services; transport, postal and warehousing; accommodation and food services; agriculture, forestry and fishing. Approximately a third of assessed employees in these industry sectors were assessed as having a SG shortfall. Across these four industry sectors the mean amounts involved ranged from $39 to $416. However in all four sectors this represented more than three quarters of the amount that should have been contributed for these employees.
4.31 An analysis of the SG 2006 survey data revealed that the mean salary and wages across each of these high risk employee segments is less than $30,000 a year, indicating that those most at risk of having insufficient superannuation contributed on their behalf were low-income employees. These are the very employees that are most reliant on the SG system for a higher standard of living in retirement.
4.32 In terms of the three ATO employer risk profiling tools, the SG 2006 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.
ATO compliance approaches
4.33 The ATO advises that ensuring that employers meet their SG obligations is a key priority and strategic risk.
4.34 In 2008-09 the ATO set out the following priorities in relation to SG compliance:
- to meet the ATO's undertaking to action every EN complaint;
- to achieve the timeliness commitments to government in relation to actioning EN complaints; and
- to undertake a proactive compliance program to audit high risk employers who do not meet their SG and Choice obligations. The ATO notes that it has not had the capacity to undertake a proactive risk based auditing program in the past.
4.35 As is evident in Table 4.2, the ATO currently mitigates risk primarily by undertaking to action all EN complaints.
up to 18 Dec 2009
|SG EN complaints||High||Micro/SME||Phone||20,199||9,881|
|Non-EN proactive referrals||High||Micro/SME||Phone||125||171|
|Employer Obligations SG audits||High||Micro/SME||MEI Field||3,763||2,020|
|Proactive Desk Audits||High||Micro/SME||Phone||n/a||233|
4.36 Of the total 24,195 SG audit activities, 20,199 related to actioning EN complaints by phone or letter. The field audits planned by the Superannuation business line were to action high risk EN complaints. The handling and outcomes of EN complaints is considered in greater detail in Chapter 5 of this report. The remaining 3,996 audit activities relate to ATO proactive work to detect SG non-compliance.
4.37 The ATO notes that proactive audit work by the Employer Obligations team incorporating SG audits have occurred for the last five years. The ATO acknowledges that it has not previously undertaken extensive risk-based auditing however in 2009-10 it estimates that 27 per cent of its SG compliance activities will be proactive work, an increase from 2008-09 where proactive work comprised 16 per cent of its overall SG compliance work.
4.38 Of the 22,242 SG audit activities planned for 2009-10, 16,316 relate to actioning EN complaints, with 4,460 employer obligation SG audits conducted by MEI and 1,648 proactive audits undertaken by the Superannuation business line.
SG compliance results
4.39 Table 4.3 outlines the ATO's compliance results across each type of audit activity.
|EN complaints 2008-09||EN complaints 2007-08||EN complaints 2006-07|
|SGC raised ($m)||%||%||%|
|Default assessment raised||102||58.1||159.9||68.6||187.7||82.2|
|Outcome - cases|
|Default assessment raised||6,170||31.2||4,754||29||4,814||44.2|
|SGC Statement lodged||4,665||23.6||3,770||23||2,084||19.1|
|Strike rate - cases|
|SGC liability raised||10,835||54.8||8,524||52.1||6,898||63.3|
|No SGC liability raised||8,947||45.2||7,843||47.9||4,000||36.7|
|Average per case|
|Default assessment raised||$16,526||$33,645||$38,994|
|SGC Statement lodged||$15,734||$19,436||$19,542|
|All debt cases||$16,185||$27,360||$33,117|
|All debt cases + GIC||$19,429||$32,189||$41,298|
|MEI SG audits||SG study||Non-EN referrals|
|SGC raised ($m)||%||%||%|
|Default assessment raised||23.5||45.5||0.68||71.9||3.1||85.6|
|Outcome - cases|
|Default assessment raised||799||21.2||48||44.4||52||41.6|
|SGC Statement lodged||1,572||41.8||13||12.1||19||15.2|
|Strike rate - cases|
|SGC liability raised||2,371||63||61||56.5||71||56.8|
|No SGC liability raised||1,392||37||47||43.5||54||43.2|
|Average per case|
|Default assessment raised||$29,349||$14,151||$59,913|
|SGC Statement lodged||$17,845||$20,837||$27,688|
|All debt cases||$21,722||$15,480||$51,289|
4.40 In relation to EN complaints, the IGT notes there has been a significant increase in the amount of SGC raised voluntarily, constituting nearly 42 per cent of SGC liabilities raised in 2008-09 (up from approximately 18 per cent in 2006-07). There has been a corresponding decrease in the amount of SGC raised by the ATO having to issue a default assessment (down from approximately 82 per cent in 2006-07 to 58 per cent in 2008-09).
4.41 This is primarily due to a change in ATO practice where employers are encouraged to lodge outstanding SGC Statements during the audit. This is further encouraged by the remission of penalties where an employer voluntary lodges a SGC Statement, even if it was prompted by an EN complaint and audit activity.
4.42 In addition, there has been a considerable decrease in the average amount of SGC raised by the issuing of a default assessment, from $38,994 per case in 2006-07 to $16,526 in 2008-09. Average amounts of SGC raised voluntarily have remained fairly steady over this same period.
4.43 The ATO advises that the drop in the average SGC liabilities from 2006-07 to 2008-09 can be attributed to streamline procedures being introduced in November 2007 to further reduce the backlog of EN complaints and case times. While the ATO does not have definitive data, it asserts that one consequence of reduced case times is that the quantum of SGC liabilities is also reduced.
4.44 The IGT also notes that MEI SG audits had the best strike rate, with 63 per cent of cases leading to an SGC liability being raised, whereas 56 per cent of EN complaints resulted in an SGC liability being raised.
4.45 The ATO advises that generally MEI SG audits will have better strike rates than EN complaints as they are identified through data-matching activities. Also, the ATO found that many EN complaints relate to entities that are insolvent whereas MEI SG audits are almost always of solvent entities.
4.46 Table 4.4 seeks to provide further detail on the break-up of the SGC raised into that arising from direct ATO compliance activity and that arising through voluntary compliance.
|Voluntary statement due to audit activity||15.7||42.6||85.5||101.4|
4.47 This confirms that the increase in the amount of SGC raised voluntarily is mostly attributable to employers lodging a SGC Statement after the ATO has commenced audit activity.
(up to 18 Dec 2008)
Note: SME 4 is a new sub-segment introduced in 2008-09
4.48 It is evident that most of the SG compliance risk is associated with the micro-business segment and, to a lesser extent, the lower end of the SME segment.
|SG Offset Credit||0||0||0||0||-3.6||-3.6||0||-22.4||-22.4|
|Part 7 penalty||0||13.9||13.9||0||12.4||12.4||0||14.1||14.1|
|GIC-Part 7 penalty||0||3.8||3.8||0||3||3||0||2.3||2.3|
Note: Due to systems limitations, the ATO is not able to separate GIC into that which is attributable to voluntary lodgements and audit activity.
4.49 The ATO advised that it is not able to provide a breakdown of the statements and amounts identified as voluntary into those arising from an EN complaint being investigated by the ATO and completely voluntary. Amounts identified as arising from audit are where the ATO has had to prepare the SGC Statement as a result of an EN complaint.
4.50 It is evident that the majority of the SGC imposed on employers relates to SG shortfall (72 per cent) and that, on average, the administrative component and nominal interest represent only 15 per cent of the SGC.
4.51 Table 4.7 reconciles the various components of the SGC raised with collections in 2006-07, 2007-08 and 2008-09.
(up to 18 Dec 2009)
|Part 7 penalty||13.9||7.2||12.4||7.6||14||4.1||10.2|
|GIC-Part 7 penalty||3.8||1.0||3||1.6||2.3||0.8||0.9|
Note: Collections data for 2009-10 is not currently available.
4.52 It is evident that, by value, most SGC collections are allocated to the employee entitlement components, namely SG shortfall and nominal interest rather than those monies collected by the Commonwealth (administration component and Part 7 penalty).
Information flows between stakeholders
4.53 The SG system has a number of stakeholders — namely, the employer, the employee, the SG contribution receiver (complying superannuation fund, retirement savings account) and the ATO. Each stakeholder has a certain responsibility and role in the system, with its effective operation dependent upon the interactions and flow of information between each of them.
4.54 Employers have an obligation to make SG contributions for eligible employees each quarter or, if they fail to do so, to lodge a SGC Statement with the ATO.
4.55 Employees have a responsibility to monitor their superannuation and follow-up on any SG shortfall with their employer or the ATO. To do so, employees must know whether the employer has made the required SG contribution to their nominated superannuation account.
4.56 Superannuation funds should process employer contributions and comply with the various lodgement requirements, such as the requirement to lodge MCS with the ATO. Some superannuation funds have also played an active role in enforcing the payment of superannuation contributions, the frequency of those payments and the requirement for employers to furnish sufficient information to allow for the timely and efficient allocation of contributions to individuals' superannuation accounts. The Industry Funds Credit Control (IFCC), which manages superannuation arrears for a wide range of industry superannuation funds, indicated that it pursues approximately 400 employers through the legal system each year and recovered approximately $75 million in unpaid superannuation last year.
4.57 However, the IFCC states that the advent of choice of fund in 2005 has significantly eroded the legal relationship between employers and superannuation funds and diminished the ability of superannuation funds to follow-up on unpaid superannuation.5
4.58 Finally, the ATO has a responsibility to ensure the timely follow-up of non-lodged SGC Statements, the handling of EN complaints and collection of unpaid SGC.
Submissions and consultation
4.59 Concerns were raised that there is no legislated requirement for an employer to provide information about SG contributions to employees. Without a requirement to provide such information an employee has no basis to confirm that their employer has paid their SG entitlement until the employee receives their annual statement from the superannuation fund. For contributions due to be paid by the end of the September quarter, information from the superannuation fund might not be received until December the following year.
4.60 It has been asserted that this makes the ATO's task more difficult and, in some cases, results in the ATO being notified that there might be a compliance issue only after the employer has gone out of business.
4.61 Individuals, the Association of Superannuation Funds of Australia (ASFA) and superannuation funds have suggested that there should be a reintroduction of reporting quarterly SG payments and shortfalls on employee pay slips.
4.62 ASFA have also noted concerns with the high level of incomplete or inaccurate information that superannuation funds receive, often resulting in payments not being associated with an employee's superannuation account. One submission stated that despite a mandatory requirement for an employer to provide an employee's Tax File Number (TFN) to a superannuation fund within 28 days of the first contribution, some funds are reporting that up to 30 per cent of new fund enrolments are made without an accompanying TFN.
4.63 The ATO advises that MCS reporting reflects a steady increase in TFN quotation, with 2008-09 data showing that 95 per cent of employee details had a TFN reported.
4.64 A number of improvements have been suggested including:
- Mandating minimum information requirements for enrolling an employee in a superannuation fund. There is currently no mandated minimum set of information that must be provided prior to issuing an interest in a superannuation fund.
- Mandating the reporting to the ATO of employees who do not provide a TFN and improving the TFN validation process.
- Introducing a requirement that an employer has not fulfilled their SG obligations until they provide a superannuation fund with not only the correct monies but also sufficient employee details.
IGT observations and findings
4.65 The IGT considers that there is scope for improving the information flows between the various stakeholders as a means of minimising the time frame between an SG shortfall arising and the ATO's awareness of it (either being triggered by an EN complaint or the ATO's own proactive work). This is through providing more information regarding the payment of SG on payslips and providing the ATO with information so as to allow it to reconcile an existing liability to pay SG with any actual payments made in a real-time environment.
More information on pay slips
4.66 In 2002 the Senate Select Committee on Superannuation and Financial Services considered that there was a need for more information to be provided by employers to employees regarding the payment of SG contributions, such as through pay slips. It believed that this would improve the information flow to employers, thereby increasing employees' awareness of whether their employers are complying with their SG responsibilities, and empowering employees to hold their employers more accountable.6
4.67 The previous reporting requirement came into effect from 1 July 2003 and was repealed from 1 January 2005. It required an employer who contributed to a complying superannuation fund for the benefit of an employee to report that contribution to the relevant employee within 30 days of making the contribution. At the time of repeal, employers expressed concerns in relation to the cost of compliance of this measure especially the time frame for reporting and further SG red tape.
4.68 The removal of the reporting requirement was supported by the following:
- Most employees already received information about employer superannuation contributions on payslips.
- Superannuation funds reported to members on an annual basis, allowing employees to be apprised of their entitlements. Also employees could contact their superannuation fund to make queries at any time, so there would seem to be little value in employers duplicating this process;
- It would provide the most significant improvement in reducing compliance costs for small business.
- The ATO had been funded in the 2004-05 Budget to raise the level of voluntary compliance and to undertake more intensive audit activity. The government indicated that this was particularly important and the need for effective compliance activity had to be emphasised in an environment of reduced reporting.
4.69 The Fair Work Regulations 2009 specify that a pay slip must include:
- the amount of each superannuation contribution that the employer made during the period to which the pay slip relates, and the name, or the name and number, of any fund to which the contribution was made; or
- the amounts of superannuation contributions that the employer is liable to make in relation to the period to which the pay slip relates, and the name, or the name and number, of any fund to which the contributions will be made.
4.70 The Fair Work Act 2009 covers all private sector employers in Victoria, Northern Territory and the Australian Capital Territory, and, in other States, employers that are constitutional corporations.7
4.71 Employers can satisfy the pay slip reporting requirement even if they do not subsequently pay the superannuation contributions to employees' superannuation funds. This means that employees have no way on knowing whether the amount included in the pay slip has been paid to the superannuation fund and are still reliant on the annual reporting from funds for information of the payment of superannuation, even though this may be more than 15 months after the event.
4.72 The IGT supports the introduction of reporting quarterly SG payments and shortfalls on employee pay slips. It will assist in minimising the timeframe between a SG shortfall arising and the employee becoming aware of the unpaid SG. It would provide employees with timely information that allows them to readily follow-up with the employer or the ATO where there has been non-payment of superannuation. It may also encourage employees to be better engaged with their superannuation.
4.73 In addition, the reintroduction of employee notification would not significantly increase employers' compliance costs if it is linked to pre-existing reporting processes. For instance, on a quarterly basis employers are required to either make contributions to their employees' superannuation funds or lodge a SGC Statement. This requires a reconciliation of an employer's SG liabilities and payments so at this point in time employers will have the requisite details that would be reported on employee payslips.
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.
Better information flows to the ATO
4.74 There is also a need to improve the quality and timeliness of information received by the ATO so as to allow it to proactively monitor and detect non-compliance. This is most relevant where employees are reluctant to lodge an EN complaint with the ATO for fear of repercussions.
4.75 The IGT found that the ATO is not able to effectively and efficiently reconcile liabilities and payments to proactively determine whether there has been potential non-compliance and undertake prompt follow-up action. In particular, it lacks timely information on whether an employer has paid superannuation by the due date, representing a significant limitation in the ATO's ability to enhance its proactive audit strategy. MCS reports and individuals' income tax returns are only lodged annually (and for some individuals quite long after the end of the income year), meaning that the ATO can only first respond to potential non-compliance more than a year after the SG shortfall first arises. MCS reports may not always provide complete employer information, making them difficult to reconcile with other data to determine whether an employer has met their SG obligations.
Options for change
4.76 The IGT notes that there are a range of options available to improve the information flows to the ATO. In any option adopted it is important that:
- The requirement for employers to provide information is confined to those in high-risk categories — for example micro-businesses or employers of certain industry sectors.
- All employers in high-risk categories are required to report rather than it being optional (either directly to the ATO or indirectly through clearing houses or superannuation funds) so as to allow the ATO to identify non-compliant employers.
4.77 Option 1 would be to have the ATO act as the clearing house for high-risk employer superannuation contributions with reporting and payment effected through the Business Activity Statement (BAS). This would provide the ATO directly with information on whether an employer has paid SG and be able to identify those employers that need to lodge a SGC Statement for follow-up action. However, the requirement for all micro-business employers to have to direct payment to the ATO and then for the ATO to distribute these payments to superannuation funds will increase the ATO's cost of administration and have a significant impact on private sector clearing houses.
4.78 Option 2 would be to require high-risk employers to use the services of a clearing house (either a private sector clearing house or Medicare Australia) in fulfilling their SG obligations. The ATO would then engage and utilise information from these clearing houses for the purposes of identifying potential non-compliance. Again, the ATO would have indirect access to information on the payment of SG while employers could potentially reduce their compliance costs through using the free superannuation clearing house service. It could also be argued that this requirement could actually assist such employers by supporting the ATO and government in maintaining a level-playing field and ensuring that competitors also meet their SG obligations.
4.79 A potential disadvantage is that it may impose an increased burden on those employers who are already doing the right thing and meeting their SG obligations by requiring them to use the services of a clearing house.
4.80 Option 3 would only require all high-risk employers to provide the ATO with a consolidated quarterly report setting out the name and TFN of their employees, the amount of contributions paid and the superannuation funds or retirement savings accounts that contributions were made to. To minimise employer compliance costs, this could be achieved through the BAS given that most micro-businesses are on a quarterly reporting for BAS. Employers are already required to either make quarterly payments to superannuation funds or lodge a SGC Statement with the ATO when they fail to pay the superannuation on time. The requirement to report to the ATO should not impose a significant burden on employers but will provide the ATO with crucial information to detect non-compliance and undertake prompt follow-up action in high risk segments.
4.81 Option 4 would be to require all superannuation funds and retirement saving account providers to lodge MCS reports with the ATO on a quarterly basis. However, superannuation funds and retirement saving account providers would have to increase the integrity of the information on these MCS reports, in particular employer details.
4.82 As an interim measure, the ATO could target high-risk employers by engaging and establishing information flows with superannuation funds and superannuation clearing houses. For instance, clearing houses would have data and information that would allow the ATO to adopt a real-time monitoring role. This would include lists of employers that have started or stopped contributing or employers that have reduced their contribution amounts.
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.
4.83 The IGT believes that the above two recommendations will have a number of benefits. First, it will minimise the timeframe between SG non-compliance and detection, helping to increase the likelihood of recovery of outstanding SGC. It will allow for more real-time ATO monitoring and rapid follow-up of high-risk employers. Together with other available data from employee declarations and income tax returns, the ATO could determine whether a potential shortfall exists without relying on an EN complaint. Second, increased employee awareness and ATO monitoring will help promote and maintain a level playing field amongst employers and ensure that compliant employers do not face a financial disadvantage against non-compliant competitors.
4.84 While these recommendations may increase the burden on some businesses, the IGT has sought to minimise this impact by framing recommendations that tie into pre-existing reporting processes. In addition, compliant employers would be significantly advantaged by the ATO being able to detect and follow-up on competing non-compliant employers.
4.85 The IGT believes that the suggestions for improving the quality of information being provided by employers to superannuation funds has merit and has referred these to the Super System Review for consideration.
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.
4.86 In its 2000 performance audit, the ANAO noted that the ATO was moving away from following up individual EN complaints, toward a more risk-based approach where high-risk groups of employers are targeted and strategies such as reminder notices and telephone calls are used. The ANAO endorsed this risk-based approach as a more effective use of resources that was more likely to lead to improvements in overall compliance levels. The ANAO also recognised that this risk-based approach could result in problems for some employees whose individual complaints may not be actioned.8
4.87 During the course of this review, and similar to the evidence before the Senate Select Committee inquiry, the IGT heard that an underlying concern with SG enforcement is that the detection of non-compliance depends on individual complaints being made by employees about apparent shortfalls.
4.88 Individuals assert that the ATO appears to wait until an employee complains before starting compliance action despite the superannuation fund receiving no SG contributions for almost a year. Many, if not most employees, will either not notice that SG contributions are not being made, or if they do, they may be hesitant to make a complaint, especially in the case of small businesses.
4.89 Submissions have suggested that the ATO should implement and improve their data matching to better identify non-compliance.
4.90 A number of submissions also suggested that the lack of resources available to the ATO to adequately deal with SG non-compliance is an issue that should be addressed as a matter of urgency. The ACTU, Industry Super Network (ISN), IFCC and the Australian Institute of Superannuation Trustees (AIST) believed that the ATO does not have the resources to perform thorough investigations and debt collection activities. The joint submission asserts that the ATO does not send auditors into workplaces to investigate SG complaints and it is unclear the degree to which the ATO cooperates with the Fair Work Ombudsman (FWO), if at all.
4.91 The Taxation Institute of Australia submitted that the ATO should use all the specific additional funding for the purpose of improving the enforcement of the SG system so as to increase the overall level of SG compliance. In addition, the ATO should take all reasonable steps to ensure that other resources at its disposal are also used to improve the effectiveness of the SG system.
4.92 The ATO states that it has developed a number of support tools to assist employees determine if they have an SG shortfall and to easily lodge their complaint. It has also developed tools for employers including:
- SG online calculator — this tool enables employers to prepare SGC Statements electronically and 10,943 voluntary SGC Statements have been received from employers using the SG calculator. There has also been an increase in the number of users, with around 35 per cent of SGC Statements now lodged by employers using the calculator.
- Online employee/contractor decision tool — this is to assist employers work out whether their new or existing workers are employees or contractors for tax and SG purposes
4.93 The ATO notes that it also provides a range of practical assistance options for small business at all times of the business lifecycle, including free seminars and business assistance visits.
4.94 An individual taxpayer's submission set out a case study of his former employer going into liquidation in November 2008 owing him and his former colleagues over $50,000 in superannuation. In early 2006 he lodged an EN complaint with the ATO and the ATO commenced an audit resulting in a SGC Statement being lodged for period up to the end of the September quarter of 2006. Despite the lodgement of the SGC Statement, no actual payments were actually made until after September 2007. In addition, no ongoing superannuation payments were made nor were further SGC Statements lodged. The employee ceased employment with this employer and subsequently lodged another EN complaint with the ATO. Soon after, the payments from the ATO to the employee's superannuation fund in relation to the September 2006 SGC Statement ceased. In June 2008 the business was sold and in November 2008 the company went into liquidation. In June 2009 the employee received a letter from the ATO informing him that the ATO will no longer pursue the SGC debt.
Proactive compliance work
4.95 The ATO advises that it undertakes a wide range of proactive compliance work utilising data matching processes to audit high risk employers who do not meet their SG obligations. This includes its SG high risk marketing strategy, the employer obligation audits performed by MEI, the SG study and its recent identification of high risk employers for proactive audit.
4.96 The ATO estimates that in 2009-10 approximately 27 per cent of its SG compliance activities will be proactive work, an increase from 2008-09 where its proactive work comprised 16 per cent of the ATO's overall SG compliance work.
Employer obligation audits and referrals
4.97 The Superannuation business line funds the MEI business line to undertake SG and Choice audits as part of their high risk PAYG(W) and employer obligation audits.
4.98 In 2008-09, the ATO conducted 4,825 employer obligation audits, of which 3,763 included an SG audit. Of those cases, an SGC liability was raised in 2,371 cases totalling $51.5 million. SGC Statements were lodged in 1,549 cases ($27.2 million) while default assessments had to be issued in the remaining 822 cases ($23.4 million).
4.99 The ATO also investigates all referrals received from third parties (other business lines, superannuation funds, the Ombudsman and trade unions) although the overall number of referrals received is fairly small. These referrals provide general information indicating that an employer is not meeting their SG obligations, but where there has been no EN complaint received by the ATO.
SG high risk marketing strategy
4.100 This strategy was first developed in late 2007 to direct targeted education messages to high risk industries. These industries were identified by obtaining data on employers who had multiple EN complaints, been subject to an MEI employer obligation audit and had SGC debts.
4.101 These employers were then grouped by sub-industry, and the three industries identified as having the highest risk were:
- hairdressing and beauty services;
- engineering design and engineering consulting services; and
- building and other industrial cleaning services.
4.102 The ATO then directed promotional material and information to the selected sub-industries through their industry bodies, associations and agencies. The ATO measured the effectiveness of this marketing campaign by comparing the voluntary lodgement of SGC Statements and the number of EN complaints lodged before and after the campaign.
4.103 The ATO believed that this strategy was successful as the average monthly voluntary SGC Statements doubled during the campaign period although there was an underlying increase in the number of default assessments. There was also an increase in the number of EN complaints received from employees working in the selected industries, suggesting a greater awareness of their SG obligations.
4.104 As a continuation of its 2008-09 high risk marketing strategy, the ATO has identified over 500 cases for proactive audit work in the three industries identified above as having the highest risk of SG non-compliance.
4.105 The ATO's SG study involved analysing employer non-compliant behaviour with SG obligations arising from the SG 2006 survey. The study took the form of a questionnaire that required selected employers to complete and return to the ATO. Each questionnaire was treated as an audit and the SG study involved further investigation of those employers that did not respond to the questionnaire despite repeated contact attempts.
Data matching to identify high risk employers for proactive audit
4.106 From 1 July 2009 proactive audits commenced on employers who were identified by an analysis of:
- MCS reports which show the employer contributions to a member's fund for a financial year.
- PAYG payment summary statements produced by the employer and identifying their employees and TFNs.
- Employers' income tax returns to allow the ATO to identify whether a particular employer has any salary and wages deduction or claimed any superannuation expense deductions.
- Individual income tax return information showing their TFN, salary and wages and employer's ABN.
4.107 By matching this data the ATO is seeking to identify employers who are not paying SG for their employees for potential audit action.
IGT observations and findings
4.108 To date, and despite a number of ANAO and Senate Select Committee recommendations to undertake more data-matching and proactive work to identify potential SG non-compliance, the ATO still places too much emphasis on EN complaints as a source of risk identification in the SG system. This arises from a combination of factors including the lack of relevant data and information, the Commissioner's commitment to investigate every EN complaint and limited resources.
4.109 The onus is placed on employees to be aware of their SG entitlements (despite complexities around employee/contractor distinction and the impact of salary sacrifice on SG entitlements), to follow up on any potential SG shortfalls and, if necessary, lodge EN complaints.
4.110 While this approach may be effective with particular classes of employees (higher income, better informed and those in stronger bargaining position) it does not adequately support or protect the least empowered employees. This is especially relevant in the micro-segment due to particular features:
- Employers: hampered by lack of time and resources and may struggle to meet their tax and superannuation obligations. More prone to cash flow issues, especially in the current economic environment, than other employers. About 95 per cent of micro enterprises lodge their returns through tax agents.
- Employees: low to medium income earners, more vulnerable, non-English speaking background, more hesitant to lodge EN complaints.
4.111 The IGT believes that the ATO's recent emphasis on data-matching as a part of its proactive SG audit work is a positive step forward. However, the IGT notes that 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. There are also significant limitations on the ATO being able to undertake real-time monitoring and follow-up with the current information flows in the SG system. As already noted the ATO receives MCS reports annually meaning that the ATO can only first respond to potential non-compliance more than a year after the SG shortfall first arises. Also, MCS reports may not always provide complete employer information, making them difficult to reconcile with other data to determine whether an employer has met their SG obligations.
4.112 The IGT considers that proactive data-matching work utilising timely and quality information regarding SG payments should be the key source of risk identification in high-risk segments.
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% 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.
4.113 In its joint submission, the ACTU suggested that employers in some industries regularly engage workers as sham contractors to avoid having to pay superannuation. It referred to one study that found that as many as 45 per cent of workers in the construction industry are sham contractors. The joint submission advocated that sham contracting should be addressed by deeming a contractor who performs more than 80 per cent of their work for one 'client' to be an employee for the purposes of the superannuation guarantee laws, as is the case for personal services income.
4.114 The Construction Forestry Mining and Energy Union expressed similar concerns about the avoidance of SG by employers through the misclassification of employees as subcontractors. It suggested that there was a need for greater ATO scrutiny of SG compliance especially in the construction industry and the classification of workers.
4.115 Other stakeholders noted the various definitions of 'employee' under the SGAA, the Fair Work Act 2009 and the common law test of the determining whether a person is an employee or independent contractor and the complexity it introduces for businesses, workers and regulators.
4.116 The 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.
4.117 The IGT believes that the sham contractor issue represents a significant systemic risk in the SG system, given that it potentially affects those most reliant upon SG as a source of retirement income. In evidence to the IGT, a number of stakeholders indicated that some employers now use the ABN as the touchstone of whether a person is an employee or independent contractor. In many instances, persons who would ordinarily be considered employees under the common law tests or under the expanded definition of employee under the SGAA, are nevertheless treated as independent contractors on the basis that they have provided an ABN.
4.118 The IGT also found that audit activity and enforcement action on this issue is resource intensive given the factual nature of the determining whether a person is an employee or independent contractor. This imposes significant costs on employers, employees and the ATO, especially where there is a dispute regarding the classification of a person for SG purposes, and uncertainty given the numerous factors that need to be considered.
Greater interaction with the Fair Work Ombudsman
4.119 The joint submission from ACTU, ISN, IFCC and AIST noted that in March 2009, the FWO completed an audit of the hospitality industry and found that 34 per cent of employers were in breach of their employment obligations. The majority of these breaches were underpayment matters (83 per cent), while 17 per cent were breaches of record-keeping obligations, including the failure to record the amount of superannuation contributions and the name of the superannuation fund on payslips. Audits suggest that approximately one third of employers underpay employees and therefore fail to meet their SG obligations.
4.120 The ATO advises that its high risk marketing strategy did consider the inclusion of cafes, restaurants, takeaway food services, adult entertainment industries and sporting clubs for potential review. However, these industries were excluded from selection as they were subject to review as part of other ATO compliance programs making it difficult to gauge the level of impact of the SG high risk marketing strategy. In relation to the identified underpayment of salary and wages, the ATO notes that SG is not payable until such time as the payment of salary and wages is actually made.
4.121 The joint submission notes that an underpayment of salary and wages will also mean that an employer has not complied with their SG obligations. It also suggests that the FWO's enforcement activities demonstrate that employers who deliberately underpay employees often deliberately avoid making superannuation payments. The joint submission recommends that because of the link between underpayment of wages and non-compliance with SG obligations, the ATO and FWO should work far more closely together.
4.122 The IGT believes that this suggestion has significant merit and the sharing of information and intelligence should happen as a matter of course. This could be aided by the establishment of a FWO liaison officer within the ATO, with responsibility for the ongoing sharing of relevant information to maximise enforcement of superannuation obligations.
4.123 The ATO advises that it had an ongoing relationship with the FWO, at least since October 2008, and has established a formal liaison officer who is based in the GST business line. Some examples of the interactions are:
- The FWO inspectors assist the ATO by distributing of the ATO's SG publication Super — What employers need to know during field visits.
- Links to the ATO website were included in the Workplace Ombudsman website, but it seems that those links have been removed when the site was updated to the FWO site. The ATO has been advised that although direct links are no longer available (although ATO website is available) superannuation information is available on their internal website.
- In 2008 an email mailbox address, managed by the Employer Obligation segment, was made available to the FWO. This allowed the FWO to direct third party complaints to the ATO for investigation.
4.124 The ATO notes that previously its ability to share information with the FWO was restricted by privacy legislation. In November 2009 a Bill was introduced (the Taxation Laws amendment (Confidentiality of Taxpayer information) Bill 2009) which provides for the sharing of compliance information between the FWO and the ATO. A Memorandum of Understanding is being developed, and once the Bill has been passed compliance information will be able to be shared between the agencies.
4 Australian National Audit Office, Superannuation Guarantee, Audit Report No. 16, 1999-2000, at 18.
5 Before 2005 employers were bound as participating employer to particular superannuation funds, either through the trust deed of the fund, through a separate participation agreement, through the industrial award system, or in the case of public sector funds, through Acts of Parliament.
6 Senate Select Committee on Superannuation and Financial Services, Enforcement of the Superannuation Guarantee Charge, April 2001, at 31.
7 Constitutional corporations include bodies incorporated under the Corporations Act of a state or territory that are trading or financial corporations, and foreign corporations. Sole traders, partnerships and family trusts are not constitutional corporations.
8 Senate Select Committee on Superannuation and Financial Services, Enforcement of the Superannuation Guarantee Charge, April 2001, at 32.