6.1 Apart from undertaking audit activity, other strategies available to the ATO to address the non-compliant behaviour of employers include the application of Part 7 penalties and prosecution action. All three represent crucial leverage points in the SG system and the ATO's administration will have an important bearing on encouraging and maintaining compliance.
6.2 In the course of the Senate Select Committee inquiry a number of submissions suggested that the penalty system for SG non-compliance was too inflexible and can lead to inappropriate outcomes. One submission stated that the penalties in relation to late payments were harsh and a disincentive to employers to voluntarily disclose non-payments or difficulties in paying.9
6.3 During the current review, the ACTU and ISN expressed the view that employers are deliberately avoiding their SG obligations because of the low risk of detection and the lack of tough penalties for non-complying employers. They suggested that the underpayment of superannuation should be treated the same as the underpayment of wages under the Fair Work Act 2009 and penalised with a civil pecuniary penalty of up to $33,000. The ACTU also suggested that in the interest of general deterrence, the ATO should direct additional resources towards compliance activities like high-profile blitz campaigns in high risk industries to identify and prosecute businesses that are not complying with their SG obligations.
6.4 ASFA submitted that there is a need for greater powers to allow for the prosecution of employers who fail to pay superannuation. It observed that there is no provision to prosecute employers for failing to actually pay an employee's superannuation to a fund and suggest that an enhancement to the ATO's compliance capabilities where an employer fails to pay superannuation on behalf of an employee.
6.5 Submissions have raised concerns that the ATO is significantly reducing failure to lodge penalties where an employer fails to lodge a SGC Statement. Some employees believe that this suggests that the ATO is not giving their SG compliance obligations the same importance that it gives to tax revenue collection.
Application of Part 7 penalties
6.6 Part 7 of the SGAA imposes, by way of administrative penalty, an additional SGC (referred to as 'Part 7 penalty') where the employer fails to provide when and as required:
- a SGC Statement; or
- information relevant to assessing the employer's liability to pay the SGC for a quarter.
6.7 This penalty effectively applies in two situations. The first situation is where a SGC Statement is lodged after the due date for lodgement (late lodgement). The second situation is when an employer fails to lodge a SGC Statement and the Commissioner assesses the employer's liability for SGC (default assessment).
6.8 The Part 7 penalty an employer is liable to pay is an amount equal to double the SGC payable by the employer. The Commissioner may remit all or part of the additional SGC payable by an employer.
6.9 In addition, an employer who makes a false or misleading statement which results in a reduced SGC being payable for a year is liable for a penalty. The amount of the penalty varies according to the amount of the 'tax shortfall' resulting from the statement.
6.10 Guidelines for ATO staff who are considering remission of additional SGC or administrative penalties imposed under s 284-75 are contained in Practice Statement Law Administration PS LA 2006/1.
6.11 The guidelines state that ATO staff:
... should bear in mind that the purpose of imposing penalties is to ensure employees' superannuation entitlements are protected and to encourage future voluntary compliance and continuing co-operation from employers. Genuine attempts to comply will be treated differently from situations where an employer does not make an effort to comply. This approach accords with principles of the Taxpayers' Charter and with the Compliance Model.
6.12 The guidelines provide that the Part 7 penalty should be remitted to some extent in all but the most extreme situations. This is because the SG regime already has significant disadvantages for employers who fail to comply with their obligations, including:
- The employer is not entitled to an income tax deduction for the SGC (while contributions to a complying superannuation fund, if made on time, are deductible).
- The SGC is calculated on salary and wages (while contributions to a fund, if made on time, are calculated by reference to an employee's notional earnings base which can be less than actual salary or wages because of additional payments made to an employee such as overtime earnings). However, the IGT notes that since 1 July 2008, an employee's notional earning base is the employee's ordinary time earnings, which includes salary and wages, shift loading, commissions and some bonuses.
- The SGC includes additional amounts — the administration and nominal interest components.
- GIC accrues on the SGC if it is not paid by the due date.
6.13 Table 6.1 outlines the basic level of remission, having regard to a number of situations.
|An employer self-assesses the liability for SGC after the due date for lodgement of the SGC Statement but prior to any action being taken by the Commissioner requiring lodgement of the statement or other information||Nil|
|An employer self-assesses the liability for SGC after the due date for lodgement of the SGC Statement in response to action taken by the Commissioner requiring lodgement of the statement or other information||Nil|
|Commissioner assesses the employer's liability for SGC based on information provided by the employer in response to the Commissioner's request.||10% of SGC|
|Commissioner assesses the employer's liability for SGC in circumstances where the employer has failed to provide information as requested.||20% of SGC|
6.14 The guidelines also set out additional factors that must be considered in determining whether a lower or higher level of remission is appropriate. For instance, a lower level of remission could be warranted where an employer has a history of failing to contribute superannuation for employees or to lodge SGC Statements on time or has prevented or obstructed the Commissioner from determining the employer's liability for the SGC.
6.15 The existence of one or more of the following factors might justify a higher level of remission:
- A new employer will not generally be penalised in the employer's first year of operation provided the employer made a genuine attempt to comply with the SG obligations.
- An established employer with an otherwise good compliance history (a whole of client perspective should be taken) or the employer made a genuine attempt to comply but made an honest mistake in fulfilling their obligations.
- The employer has taken steps to mitigate the circumstances that caused the failure to fulfil the obligations or the employer provided a high level of co-operation to the ATO.
IGT observations and findings
6.16 The lodgement of a SGC Statement by the due date is an important part of the SG system, demonstrated by Parliament imposing a penalty of double the SGC payable by the employer. SGC Statements inform the ATO that an employer has not met their SG obligations and allows the ATO to promptly follow-up and ensure compliance and payment.
6.17 The IGT considers that ATO's current administration of the Part 7 penalty system does not promote the timely lodgement of SGC Statements.
6.18 The IGT found that the average Part 7 penalty rate in audit cases (those finalised by way of the ATO issuing a default assessment) was 10 per cent of the SGC. No Part 7 penalty was applied in cases treated as voluntary by the ATO, even where a SGC Statement was lodged more than two years after the due date and after an EN complaint was lodged with the ATO. The average Part 7 penalty rate across all cases was approximately 4 per cent of the SGC.
6.19 The IGT notes that the Part 7 penalty regime, and its administration, differs significantly from other agencies which are also responsibility for protecting employee entitlements. For example, the FWO can and does seek the application of civil pecuniary penalties in the order of $50,000 even for a $5,000 underpayment in wages.
6.20 While it is important to encourage employers to comply, the IGT believes that the current administrative approaches, especially where an employer lodges a SGC Statement after an employee has lodged an EN complaint, do not provide an appropriate deterrent effect. Nor does it place sufficient importance on the need to protect employees' SG entitlements through the timely lodgement of SGC Statements.
6.21 The IGT believes that there is significant scope for the ATO to increase the penalties imposed on employers that fail to lodge a SGC Statement on time, especially for the more egregious and consistently non-compliant employers. This will encourage employers to lodge on time and better protect the superannuation of employees through the timely lodgement of SGC Statements. It will also help maintain a level playing field amongst employers by discouraging the unfair competitive advantage obtained by using unpaid SGC amounts as working capital or otherwise.
6.22 The ATO advises that a review of PS LA 2006/1 commenced in November 2009. This review will look at the guidance for audit officers for remission of penalties, and consider the imposition of penalties on employers who continuously lodge SGC Statements late.
6.23 The ATO states that aspects of the SG system (non-deductibility of the SGC and the imposition of the nominal interest charge and administrative component) constitute a package of penalties.
6.24 The IGT has found that penalty effect of the non-deductibility of the SGC and the imposition of the nominal interest charge and administrative component has resulted in the ATO exercising a far broader remission of the Part 7 penalty.10
6.25 The IGT believes that aspects of the current SG system that have a penalty effect on employers may not be the most effective deterrent against the non-payment of SG entitlements and the non-lodgement of SGC Statements. Many employers become aware or understand the financial impact of the current penalty system only after the ATO has issued an assessment raising doubts of how effective the penalty system currently is in encouraging voluntary compliance, especially around the lodgement of SGC Statements.
6.26 The Taxation Institute of Australia (TIA) submitted that the SGC, especially its non-deductibility, is disproportionate to non-compliance. It believes that there would be a positive impact on SG compliance if the SGC was deductible for voluntary disclosures where the failure to comply with the SG obligations did not result from intentional disregard of the law.
6.27 The IGT also found it difficult to measure the deterrent effect of the non-deductibility of the SGC as there was no way to determine whether the amount claimed by an employer as a superannuation deduction includes SGC amounts without a detailed review.
6.28 From an administrative perspective, this makes it problematic for the ATO to utilise the non-deductibility of the SGC as a strong leverage point in punishing undesirable behaviour (the non-payment of superannuation by the due date) and promoting the desired compliant behaviour. It also means that the ATO would subject employers to higher compliance costs if it wants to examine whether an employer has inappropriately claimed a deduction for SGC amounts.
6.29 The administration of the SG system, and the ATO's ability to maximise voluntary compliance and deter non-compliance, may be improved if there was a simpler and more transparent penalty regime applying to the non-lodgement of SGC Statements and the non-payment of SG.
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.
6.30 Prosecution is a powerful instrument of deterrence and accountability and is the firmest of the compliance strategies available to the ATO. A prosecution is an action brought against an employer in a court for a breach of the law of the Commonwealth.
6.31 In 2002, the Senate Select Committee heard a number of consumer and industry groups critical of the ATO's lack of prosecutions.11 Some suggested that the lack of prosecutions by the ATO can act as an incentive for non-compliance. In response the ATO indicated that it had developed a detailed prosecution policy and it had prosecuted a number of employers for failing to comply with SG requirements. It also stated that it did not believe that prosecution action was always the most appropriate method to address non-compliance as, in certain cases, it could have detrimental consequences for employers and employees without necessarily resulting in the recovery of the SGC liability.
Current ATO prosecution approaches
6.32 In deciding whether to investigate or prosecute, the ATO is required to have regard to the guidelines set out in the Commonwealth Prosecution Policy. The policy provides that, as a general rule, the more serious an alleged offence is, the more likely it is to be prosecuted rather than dealt with by some other process. The ATO states that its investigative resources are limited and should be focussed on the most appropriate cases in accordance with the ATO's policies.
6.33 Prosecutions for breaches of the SG law are primarily for failure to provide information under section 77 of the SGAA. However, the ATO may also prosecute for failing to respond to a request for information under section 34 of the SGAA.
6.34 The maximum prosecution penalties for failure to comply with a requirement of a tax law to furnish information or a statement is a fine of:
- $2,200 for a first offence;
- $4,400 for a second offence for both natural persons and corporations; and
- a third offence for a natural person of $5,500 and/or 12 months imprisonment, and $27,500 for a corporation
6.35 In 2006-07 a decision was made to focus on raising default assessments (and impose Part 7 penalties) rather than prosecute. The reasoning behind this decision at that time was that resources were concentrated on reducing the number of SG EN complaint cases on hand. Prosecution cases took significant resources and these resources were utilised in clearing the backlog of EN complaint cases.
6.36 The ATO believed that by raising default assessments (and imposing Part 7 penalties) there was an advantage of raising the liability sooner, and improving its chances of collection. The ATO also found that previous prosecution results indicated relatively small fines.
6.37 Figures in Table 6.2 reflect the number of successful prosecutions as a result of non compliance with section 77 notices and the value of fines applied for the period from 1 January 2004 to 31 December 2006.
|Period||Number of fines||Total value ($)||Average value ($)|
|1 January 2004 — 30 June 2004||177||109,665||619|
|1 July — 30 June 2005||241||198,700||824|
|1 July 2005 — 30 June 2006||242||232,188||959|
|1 July 2006 — 31 December 2006||17||21,050||1,238|
6.38 In 2006-07, Part 7 penalty per cases averaged $4,300 whereas court imposed fines averaged $1,200 for the same period.
6.39 In early 2008 the ATO decided to consider recommencing prosecutions to enable a higher profile to be given to SG compliance action. The ATO sought advice in respect to possible prosecutions under section 8C of the Taxation Administration Act 1953 utilising sections 33 or 34 of the SGAA.
6.40 The advice received was to continue to utilise section 77 of the SGAA to capture the failure to provide SGC Statements given the vulnerability of successful challenge in attempting to utilise either sections 33 or 34 SGAA.
6.41 In 2008 the ATO commenced a pilot project to select cases for potential prosecution, identifying non-compliant employers in February and July 2008. As part of this project the ATO revised its procedures, support tools and scripting on issuing section 77 notices. The combined results were as follows:
|Event||Number of cases|
|Finalised from initial audit letter||33|
|Insolvent employers or no further action||17|
|Section 77 notices issued||24|
|Of the 24 section 77 notices issued:|
|Responded to section 77 notice||11|
|Intention to prosecute letter issued||13|
|Of the 13 intent letters issued:|
|No further action due to various reasons||9|
|Referred to prosecution||4|
|Successful prosecution (in 2009)||4|
|Total penalties imposed in 4 cases||$2,700 plus $466 in costs|
6.42 The ATO advises that the project was successful in obtaining responses from employers and therefore fewer non-response default assessments being raised leading to fewer disputes. The ATO adopted this process to all high risk employers identified through data matching or third party referrals. High risk employers were selected on the basis of the following criteria:
- Four or more default assessments issued over the previous four years;
- SGC debt greater than $10,000 or had other debt; or
- Outstanding income tax returns and BAS.
6.43 Table 6.4 sets out the project results from July 2008 to date:
|Event||Number of cases|
|Section 77 notices issued||39|
|Response to section 77 notice or insolvent employer||36|
|Referred to prosecution||1|
|Penalties imposed in 1 case||$500 plus $122 in costs|
IGT observations and findings
6.44 The IGT agrees that prosecution action should be reserved for the more egregious employers. However, the current use of prosecution action has not had a significant deterrent effect due to the low number of cases selected for prosecution, the relatively small fines imposed and the absence of any wider community communication of successful prosecution action (such as the ATO media campaigns accompanying successful prosecution action for GST and income tax fraud).
6.45 This is to be contrasted to the much greater range of graded penalties available to the FWO and its emphasis on civil pecuniary penalties as a means to achieve both specific and general deterrence.
6.46 Offences under the Fair Work Act 2009 are punishable by a maximum fine of $33,000 for a corporation. Responses and penalties available to the FWO consists of: mediation referral, advice to employees to refer matter to small claims court, issuing a letter of caution, issuing infringement notices, accepting an enforceable undertaking, issuing a compliance notice and commencing litigation proceedings for the imposition of civil pecuniary penalties.
6.47 The FWO website contains a comprehensive list of all legal action taken from 2006-07 onwards in imposing penalties for the breach of award conditions. This provides a strong message to employers and their advisers that breaches of working conditions and entitlements will be penalised.
6.48 The FWO has also received strong support from the Federal Magistrates Court and Federal Court in placing importance on the protection of employee entitlements. In the context of civil pecuniary penalties, the authorities have emphasised the significance of deterrence, both specific and general, in setting pecuniary penalties, stating that '[f]or a penalty to have the desired effect, it must be imposed at a meaningful level'.12
6.49 The IGT would support the introduction of civil pecuniary penalties where an employer fails to pay superannuation on behalf of an employee. The IGT believes that the operation of these penalties under the Fair Work Act 2009, together with the FWO's approaches and leverage strategies, have provided a strong deterrent effect. The administration of the SG system would similarly benefit with the inclusion of such a penalty regime and ensure that employer superannuation contributions are provided the same protection as other employee entitlements.
6.50 It would also allow the ATO to adopt a far stronger and effective prosecution strategy, especially given the relatively small fines previously achieved by the ATO where it sought to prosecute employers for failing to provide information.
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.
9 Senate Select Committee on Superannuation and Financial Services, Enforcement of the Superannuation Guarantee Charge, April 2001, at 43.
10 The IGT estimates that if an employer paid SG on time for four workers on $63,000, the net cost to the employer in a year is $15,876. If the same employer was to pay SG one month late each quarter during the year the net cost to the employer is $23,390 (without Part 7 penalties). If the ATO was to impose Part 7 penalties at a rate of 10 per cent then the net cost to the employer is $26,323. Clearly, for small delays in paying SG most of the additional cost to the employer is attributable to the non-deductibility of the SGC. However, the nominal interest component would impose a more significant cost to employers for longer delays in paying SG.
11 Senate Select Committee on Superannuation and Financial Services, Enforcement of the Superannuation Guarantee Charge, April 2001, at 28.
12 Australian Competition and Consumer Commission v ABB Transmission and Distribution Limited  FCA 383 at , Finkelstein J.