Since claiming the title of the second pillar of Australia’s retirement income system, the superannuation guarantee (SG) has played an important role in shaping the strategies available to financial planners. However, like many other ‘new tax system’ laws introduced in the late twentieth century, there is a high level of complexity in how the SG system works in practice.

In this article, we will revisit how the SG system operates, as well as looking at both the recent integrity changes and the amnesty for employers.

Fundamentals of the super guarantee

 At its core, the SG system ensures employers make super contributions on behalf of their employees, based on an employee’s ‘ordinary time earnings’. Technically speaking, an employer is not legally required to pay the SG, however, the penalty for non-compliance means SG contributions for employees are made via the enforcement of penalties paid to the Australian Taxation Office (ATO), which is then passed on to the employee. There are also significant additional costs which are borne by the employer. Employers who make the right contributions, at the right time, will avoid these penalties.

Contributions by an employer must be made either to the super fund chosen by the employee, or if no choice is made, to the employer’s default fund. Employers have until 28 days after the end of the quarter to make contributions. These contributions reduce the employer’s SG shortfall.

If an employer has a shortfall at the end of the quarter, they become liable to pay the SG charge, which is the penalty enforceable by the ATO. The charge consists of three components – the shortfall component (calculated with reference to salary and wages), the nominal interest component and the administration component. If the ATO collects any SG charge amounts, it is required to pay the charge amounts to employees, generally via super.

Practically speaking, SG starts with a consideration as to what constitutes ‘ordinary time earnings’. To avoid any SG penalties, the employer needs to contribute at least 9.5 per cent of each employee’s ordinary time earnings.

The Superannuation Guarantee (Administration) Act 1992, section 6, defines ordinary time earnings as follows:

Ordinary time earnings, in relation to an employee, means:

(a) the total of:

(i) earnings in respect of ordinary hours of work other than earnings consisting of a lump sum payment of any of the following kinds made to the employee on termination of his or her employment

(A) a payment in lieu of unused sick leave

(B) an unused annual leave payment, or unused long service leave payment, within the meaning of the Income Tax Assessment Act 1997, and

(ii) earnings consisting of over-award payments, shift-loading or commission, or

(b) if the total ascertained in accordance with paragraph (a) would be greater than the maximum contribution base for the quarter – the maximum contribution base.

The maximum contributions base acts as a limit on the ordinary time earnings the employer is liable to pay SG upon and is $55,270 per quarter ($221,080 per year) for the 2019/20 financial year. An employer does not have an SG obligation beyond this limit. However, an employee’s contract of employment may prescribe employer contributions of a higher level, or an employer may not be aware of the maximum contributions base. In most cases, an employer’s SG obligations up to the maximum contributions base alone should not create excess concessional contributions issues for employees.

The definition is also reliant on ‘earnings in respect of ordinary hours of work’ which, given the wide variety of employment arrangements that exist, is not always clear. The ATO prepared SGR 2009/2 to help address both the ordinary time earnings definition, as well as what constitutes salary and wages for the purpose of understanding the SG charge.

SGR 2009/2 sets out that ordinary time earnings is considered a sub-set of salary and wages, meaning not everything that is salary and wages is ordinary time earnings, but anything that is ordinary time earnings is also salary and wages.

It also sets out that ordinary hours of work may not be explicitly specified by an employment agreement and are not limited to 9:00am to 5:00pm, Monday to Friday. The ruling also considers whether certain payments are ordinary time earnings. The ruling has been synthesised into a checklist issued by the ATO, however, common items include:

• Hours worked as specific ‘overtime’ under an award are not ordinary time earnings but are considered salary and wages.
• If no ordinary hours of work are stipulated, then all hours of work will generally be considered ordinary time earnings.
• Allowances are considered ordinary time earnings if they are an unconditional extra payment. However, if these are reimbursements or expected to be fully spent in the course of employment, these are not considered ordinary time earnings.
• Leave that is served is considered ordinary time earnings, except for annual leave loading where it is demonstrably referable to a loss of opportunity to work overtime.
• Bonuses are considered ordinary time earnings unless the payment is solely in respect to overtime.

Understanding SG shortfalls

The first step in identifying whether an employer has an SG issue is to calculate the SG shortfall for each employee who qualifies for SG support for the quarter. The formula provided by section 19 of the Superannuation Guarantee (Administration) Act 1992 is:

Salary or wages is a defined term considered by SGR 2009/2 and covers most of the remuneration an employee is likely to receive from their employer, excluding amounts by way of reimbursement. For example, although overtime hours are considered ‘salary or wages’, they are excluded from ordinary time earnings.

The charge percentage is set by section19(2) and includes the legislated increase of the SG rate to 12 per cent, with the next move from 9.5 per cent to 10 per cent due from 1 July 2021. This percentage is, however, reduced by certain contributions. In the case of employers who are not contributing to a defined benefit fund, section 23 provides that the charge percentage for an employer is reduced as follows:

This is where the employer’s ‘obligation’ to make contributions as a proportion of ordinary time earnings lies, as the combination of the above formulas results in no shortfall arising if an employer makes contributions equal to 9.5 per cent of an employee’s ordinary time earnings in a quarter, even though the shortfall calculation only considers salary and wages.

Example 1

Joey works for Maccan Cheese, a takeaway restaurant. He is employed under an award that provides a base quarterly salary of $15,000, plus provisions for overtime paid outside the hours stated in his employment contract, and the award provides overtime to be paid at 2.5 times his standard hourly rate.

During the last quarter, Joey worked significant amounts of overtime at Maccan Cheese and generated additional gross income of $10,000, bringing his total salary to $25,000 for the quarter. During this same period, Maccan Cheese made $1,425 of contributions to its default super fund, since Joey did not choose an alternative super fund.

For the purposes of calculating the SG shortfall, Maccan Cheese use Joey’s salary and wages of $25,000. However, the SG charge rate of 9.5 per cent is reduced by the calculation in section 23, calculated by taking the employer’s contributions and dividing it by Joey’s ordinary times earnings base, as shown below:

$1,425 / $15,000 x 100 = 9.5%

Accordingly, the charge rate for Maccan Cheese in relation to Joey is 0 per cent (calculated as the 9.5 per cent ‘base’ charge rate reduced by 9.5 per cent calculated under section 23). This means Maccan Cheese does not have a SG shortfall for the quarter in relation to Joey.

However, if an employer does not reduce their charge percentage to zero by making contributions at least equal to the SG rate multiplied by the employee’s ordinary time earnings, the shortfall rate will not be zero, and the shortfall will be calculated based on the employee’s salary and wages, which is potentially higher.

Example 2

Consider Joey and Maccan Cheese from Example 1. If Maccan Cheese, instead, only made $1,000 of contributions for Joey for the quarter – $425 less than the amount that resulted in no shortfall – then the section 23 reduction is:

$1,000 / $15,000 x 100 = 6.67%

In this scenario, the shortfall of Maccan Cheese is calculated with reference to Joey’s salary and wages for the quarter, not his ordinary time earnings. The calculation for the shortfall in relation to Joey is:

$25,000 x (9.5% – 6.67%) / 100 = $707.50

So, by not making the additional $425 contribution within the quarter, Maccan Cheese is liable for a shortfall of $707.50. This shortfall is also subject to additional interest and administrative penalties.

The SG charge

 If, at the end of the quarter, an employer has a shortfall, the employer will be liable for the super guarantee charge (SGC), which is a penalty collected by the ATO. This consists of three separate elements:

1. The shortfall component for each employee.
2. An interest component calculated at 10 per cent per year for each shortfall commencing at the start of the quarter to which the shortfall relates until the date when the employer lodges their SGC statement.
3. An administration charge of $20 per employee who has a shortfall.

There is also an additional 25 per cent penalty if the employer has not followed a valid choice direction made by an employee.

The SGC is communicated to the ATO by the employer completing a super guarantee statement, listing the employer’s shortfalls for the quarter. The current version of the statement calculates the interest component and administration charge, but employers are still required to self-assess their shortfall liability. This statement must be lodged by 28 days of the second month after the end of the quarter.

While, typically, employers can claim a tax deduction for their employer contributions, the SGC is not a contribution to super and is considered a non-deductible tax penalty incurred by the business. Further, the directors of a company are not protected by the corporate structure if the company does not pay the SGC. If an SGC liability remains unpaid after 21 days, the ATO can issue a director penalty notice to collect the outstanding SGC from company directors directly.

Once the SGC is paid to the ATO, the ATO will make a contribution to super for employees, subject to the shortfall. In the case of an individual with a shortfall who is over age 65, the ATO can make the payment directly to the individual, rather than making a contribution to super. Please note, employers cannot make super guarantee contributions direct to employees at any age. The on-paying of SGC amounts is solely an ATO function.

Recent changes to SG

The Government has introduced several measures to address specific issues with the super guarantee system.

Employer exemption certificates

Like many super and tax measures, SG was designed for a simple scenario, where people only have one employer. However, people may have multiple employers, and each employer has an SG requirement to meet. As the concessional contribution cap has reduced over time, it is increasingly common for people working in certain professions to have multiple employers where the combined SG contributions exceed the concessional contributions cap.

To reduce this issue, it’s now possible for people in these circumstances to apply to the ATO for a shortfall exemption certificate. This allows the ATO to exempt employer(s) from paying SG for a quarter when the ATO is satisfied the person is likely to exceed their concessional contributions cap due to SG contributions from multiple employers.

The ATO will not issue a certificate when a person is unlikely to exceed the cap, or when a person has a single employer who is paying contributions in excess of their SG entitlement (which generally occurs when an employer does not apply the maximum contributions base). The ATO will decide on which employer(s) it will exempt, to ensure the greatest amount of SG be paid without exceeding the cap.

Additionally, the exemption does not explicitly require the employer to pay an additional salary in favour of the unpaid SG, so people should ensure they confirm with their employer as to whether they will increase their remuneration by the unpaid SG amount.

Salary sacrifice integrity measures

 One of the common categories of payments which does not fall within the definition of salary or wages, and accordingly is also excluded from ordinary time earnings, is salary packaged amounts. This occurs even if the amount is considered a fringe benefit. Salary sacrificed super contributions are a form of salary packaging. Before 1 January 2020, this resulted in a reduction in both salary and wages, and ordinary time earnings, which meant salary sacrifice reduced an employer’s SG obligations.

Contributions an employer made under a salary sacrifice arrangement were considered employer contributions. The Superannuation Guarantee (Administration) Act 1992 did not distinguish between contributions made by an employer to avoid an SG shortfall and contributions made under a salary packaging arrangement. This provided a ‘loophole’ where employers could consider themselves as having met their requirements under SG to make ‘contributions’ by simply making the agreed salary sacrifice contributions.

Example 3: Pre 1 January 2020

 Sandra is employed on a base salary of $80,000 per year, which is all ordinary time earnings. Her employer calculates her SG support to be $7,600 per year. Sandra agrees with her employer to sacrifice $10,000 of her salary in exchange for her employer making additional super contributions.

As a result, Sandra’s ordinary time earnings reduces to $70,000 and her employer recalculates the required SG support to $6,650, a reduction of $950 per year (9.5 per cent of the $10,000 sacrificed). Sandra would now only receive $16,650 in employer contributions as a result.

Additionally, since the salary sacrificed contributions are contributions made to super by the employer, the $10,000 legally counts towards the ‘contributions’ made by the employer under section 23.

Assuming the employer makes salary sacrifice contributions regularly throughout the year, then each quarter the $2,500 contributions made under the salary packaging agreement would result in no shortfall – even if the employer does not make additional contributions. In this case, Sandra’s employer will only have paid $10,000 of contributions to her super throughout the year, rather than the $17,600 she expected to be made on her behalf.

However, since 1 January 2020, the definition of ‘ordinary time earnings base’ and ‘salary or wages base’ used in SG calculations explicitly add salary sacrificed super contributions to these amounts. Additionally, the contributions definition in section 23 explicitly excludes salary sacrifice super contributions, so these loopholes have now been closed.

As a result, employers who are now increasing their SG support, could now be inadvertently creating excess concessional contributions issues for their employees.

Example 4: From 1 January 2020

Consider Sandra’s scenario from Example 3. From 1 January 2020, Sandra’s employer must include the $10,000 salary sacrificed amount in both her salary or wages, and ordinary time earnings. Further, salary sacrificed contributions can no longer be used to reduce the employer’s SG percentage under section 23.

As a result, even though Sandra is salary sacrificing $10,000, her employer is still obliged to pay contributions based on ordinary time earnings of $80,000 per year and cannot use the salary sacrifice contributions to satisfy their SG obligation. Sandra will now receive increased employer contributions as a result.

However, Sandra had only anticipated her employer making $16,650 of contributions for the year and has already made a personal concessional contribution of $8,350 to maximise her concessional contributions for the year. If she does not make any changes, Sandra would exceed the concessional contributions cap by $475, as the increased SG contributions will apply for only six months.

Conclusion

SG is fundamental to retirement planning, and a key requirement for clients who operate businesses and hire employees. The recent changes to SG laws allow people more flexibility in managing multiple employers, while also correcting some of the unintended consequences of salary sacrifice contributions being considered salary packaged amounts.

Josh Rundmann, Technical Services Manager, IOOF TechConnect. 

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QUESTIONS

To answer the following questions, click here.

1. What value is used to calculate the super guarantee shortfall?

a. Ordinary time earnings.
b. Salary and wages.
c. Nominal interest rate.
d. Administration fee.

2. What value is used to calculate the reduction of the super guarantee percentage?

a. Ordinary time earnings.
b. Salary and wages.
c. Nominal interest rate.
d. Administration fee.

3. From 1 January 2020, salary sacrificed contributions do not count towards ordinary time earnings. True or false?

a. True
b. False

4. Which of the following amounts are not considered ordinary time earnings?

a. Hours specified as overtime.
b. Annual leave loadings.
c. An allowance paid for travel, that is reasonably expected to be used to meet travel expenses in lieu of the employee claiming reimbursements.
d. All of the above.

5. Austin works as a casual employee for a newsagency and in a quarter receives the following payments:

• Base pay of $3,000.
• Overtime of $1,400.

The newsagency makes an employer contribution of $180 for the quarter. What is the super guarantee shortfall for the newsagent for the quarter?
a. $0.
b. $148.75.
c. $154.
d. $212.