My Business explores the debate raging about employee superannuation contributions, and the penalties imposed on businesses for late payment. Are they justified? Should they be increased? What can be done to make the process more efficient?
Research by Industry Super Australia and Cbus used data from the tax office and ABS to estimate that nearly a third (30 per cent) of Australian workers are being short-changed on their superannuation entitlements, to the tune of $3.6 billion in 2013-14.
That equates to an average of $1,489 for each affected worker. SMEs were the most likely to be underpaying their employee entitlements.
“The implications are wider than the individual. Today’s retirement income policies are made on the assumption that, into the future, we’ll all have super. As pension access tightens and home ownership declines, those missing out on compulsory super stand little chance of a decent standard of living in retirement,” says David Whiteley, chief executive at Industry Super Australia.
Cbus chairman and former Victorian premier Steve Bracks adds that many workers are only discovering their entitlements are being withheld – either in part or in full – when it is too late.
“We have stories of workers who’ve put faith in the system, only to discover months later that their super, including extra voluntary contributions, has not been paid into their accounts and is lost completely when companies move into liquidation,” he says.
In a statement released in response to the revelations, Peter Koutsoukis, principal of law firm Maurice Blackburn, said it also highlighted potential flow-on effects, such as the ability for employees to access insurance benefits through their superannuation.
“Sadly, this is a scenario we see too often, where someone believes they have TPD insurance through their super, only to find out when it’s too late that their employer has not been paying the proper contributions, sometimes for a number of years,” Mr Koutsoukis said.
“This leaves people at a major disadvantage in seeking to access insurance they are entitled to, when they are already in a stressful situation dealing with a significant injury or illness.
“The findings of today’s report should serve as a wake-up call to all employers and government that not meeting your obligations when it comes to paying employees’ super contributions is unacceptable and cannot be allowed to continue.”
Calls for a tougher stance
The findings of this research sparked heated debate about what could be done to ensure super payments are being made on time. Many laid the blame squarely with business owners.
Speaking to My Business, workplace lawyer Aron Neilson of Slater and Gordon says that he agrees the underpayment of superannuation contributions is a serious problem, with far-reaching implications for employees and for business owners.
“I think the issue of underpayment of superannuation is a significant problem, and it's good that the report has actually come out and highlighted it,” he says.
“What happens is that when employees don't get paid their superannuation, they don't find out often until after they leave their employer, and then they make a complaint to the taxation office.”
According to Aron, the ATO has been swamped with complaints from concerned workers, which is slowing down its investigation times. Along with the report's authors, he is calling on the government to impose even stricter penalties on employers who fail to meet their obligations.
“The first step is obviously the tax office [gets] in touch with the employer to try and work out why the monies haven't been paid. If it hasn't been paid, then the tax office imposes a charge the equivalent of the amount of unpaid superannuation on the tax bill of the employer and then they charge an interest rate on top of that and an administration charge,” he explains.
“The penalties do need to be greater for non-payment of superannuation.”
Aron suggests that the underpayment of superannuation may be even more pronounced than the figures suggest, given that many employees are afraid to broach the subject with their employers for fear of losing their job. Yet he warns business owners against using this threat to cover their tracks.
“Where the situation can be different is if an employee is covered by an enterprise agreement that has a superannuation clause in it, because what that does is give the employee an independent right to enforce the non-payment of superannuation against the employer, and in so doing, they can seek a penalty under the Fair Work Act for the employer's contravention of that agreement.”
Additionally, workers who are sacked for voicing their concerns about underpayment also have a just cause to launch unfair dismissal proceedings against their employer.
Mixed reactions from business owners
Business owners themselves, meanwhile, had decidedly mixed reactions at the prospect of tougher penalties. On the My Business site, social media platforms and by email, readers flocked to share their experiences of an imperfect system.
Some whole-heartedly agree that those SME owners deliberately doing the wrong thing should be punished more severely. Others pointed out that a one-size-fits all approach to deliberate withholding of funds and simple errors is unfair, as is the lumping of responsibility onto employers.
“I think the situation is the system is not a workable one. The employee should also have a responsibility for the contribution out of their gross pay; this is just another case of having to babysit the employee,” said one.
Another said the problem may lie with large companies failing to pay small suppliers on time, leaving them unable to meet their payment obligations:
“While asking, perhaps these researchers could research what the size of debtor debt is to small business. Perhaps they might discover where this ‘lost’ superannuation is.
“If a creditor does not pay or pay on time, then the money does not exist to pay superannuation or BAS or wages tax for that matter. SMEs are not multinationals with hundreds of millions in the bank; most are struggling small businesses waiting inordinate times for payment and being treated unconscionably by large businesses who know they can leverage their market power with impunity.”
Another idea put forward was that the ATO should take on greater responsibility for identifying defaulters early on, and that better reporting systems would identify underpayment much earlier.
“The difficulty is in balancing the interests of employers and employees and, as is always the case, the complying businesses pay for the sins of the defaulters. Single touch payroll is still a way off for the smaller end of town, but it will apply to them too eventually, as it should,” said one respondent.
Another added: “The employee has a responsibility to check as well and then report to the ATO any discrepancies that are not corrected by their employer in a timely manner. Two-thirds of employers already do the right thing.”
Where is the ATO in all this?
Another point made by many business owners – and backed up by accountants and bookkeepers – is why the ATO is working itself into a frenzy issuing penalty notices after the fact, instead of taking a more active approach to helping both employees and their employers submit details and funds by their due date.
My Business reader Duncan Smith, of Business Advice + Tax, noted that, “A Sydney newspaper suggested super guarantee (SG) was paid every four months. On the same page, it was revealed Centrelink was issuing 20,000 infringement notices a week (formally 20,000 infringement notices a year). The reason given was better use of computerised systems in data matching with the ATO.
“Maybe the ATO should be using better computerised systems to track those employers who do not pay super or not pay on time.”
Victorian bookkeeper David Farrugia, director of Top Notch Consulting, says that the existing penalties for late payment of employee superannuation entitlements are actually skewed in the favour of those business owners it is meant to target – meaning harsher penalties would do nothing to solve the problem.
“Superannuation is handled differently to almost every other accounting expense in business. So, you have to actually pay the super to get a tax deduction for it; just having the bill is not sufficient,” he says.
“And you pay one day late, whether it's your fault or not, and the ATO's view is ‘tough luck, you're going to cop administrative fees and interest dating back to the start of the quarter it related to’. The actual calculation of the interest is not appropriate, because it's not late until after the due date, yet when you calculate the interest, you've got to go back to the start of the quarter it relates to.”
While this can be a costly exercise to rectify for business owners who have been caught unawares, David says payment dodgers feel like they have gotten off lightly.
“It's not as bad on the employer where they've deliberately gone out of their way to avoid it, and usually the ones that are really big culprits, they've got a couple of quarters [unpaid],” he says.
“They sort of feel that they dodged a bullet for a while, now they've got to pay some extra money to sort this out; they don't like it, but such is life. I just don't feel like these employers are really upset.”
According to David, the archaic rules are likely an “old-fashioned oversight” on the part of the ATO, but that is little comfort to the business owners trying to do the right thing who are stung with penalties because of administrative errors, even those for which they are not responsible.
“People who do continue to dodge, they should be penalised to the highest degree. But the ones where – and I've got one client that uses a payroll bureau, the bureau accidentally puts two digits around backwards, the super ends up bouncing. By the time we find out what's gone wrong, why it's bounced and get it all sorted out, we've now missed the deadline. It's just not appropriate to penalise people for those sorts of mistakes, it's just human error,” he explains.
If you are one of the businesses to have been caught in this unfortunate trap, don’t think you are alone – David says that among his client base, inadvertent errors are happening around 50 per cent of the time.
“My clients have got 50 to 100 employees: you're pretty much changing two or three employees’ details a quarter now, because so many people are going into self-managed super funds, and the rules about the information that you've got to provide for them is different, so you're relying on the employee to give you the right information,” says David.
“There's no formal letters half the time, so it's handwritten or even though it's a Word document, it's not a formal letter from the super fund saying 'this is what you need to do'. There are so many opportunities for human error to creep in whenever there's a change in superannuation details.”
The ATO went on record stating that it is actively cracking down on employers failing to meet their superannuation obligations.
It told ABC News that in the 2015/16 financial year “we raised $670 million in SG [including penalties] from a range of ATO compliance review and audit activities. We raised 2,997 default assessments to employers as a result of reports from employees, totalling approximately $171 million in SG for the benefit of employees.”
Meeting your responsibilities
As accountant Alexander Laureti, of LMS Advisory, points out, “Really, your business is responsible for collecting a payment on behalf of the government and on behalf of doing the right things for the employees as well.”
While debating improvements to the process may help to deliver efficiencies and a fairer system down the track, it’s important not to overlook the here and now. To ensure you are staying on top of your superannuation payments, Alexander suggests going back to a good old-fashioned budget.
“I think that a lot of business owners don't budget. They know roughly what has to happen, but a lot of them get caught by surprise when, for example, the superannuation bill becomes due and payable: they know roughly that super is due at this time, but they're not quite sure how much it is,” says Alexander.
“The hardest thing for business owners is to have time to plan out what their upcoming obligations are weekly, monthly, fortnightly going ahead. If you don't have an idea of what your superannuation obligations are, and you realise on the day it's due that you need to come up with the money to pay for that, then obviously, that gives a much more likelihood of not having enough money at that time to pay that bill.”
Under the current super guarantee as it currently stands, employers are required to pay 9.5 per cent superannuation for every employee who is aged over 18 and earning at least $450 per month.
If you have employees under the age of 30, or they are domestic workers (such as nannies), they must also work at least 30 hours per week before you are required to start paying superannuation.
Payments must be made quarterly, and are due 28 days after the end of each operating quarter.
Few people enjoy dealing with the tax office (and even less actually paying money to it). By keeping up-to-date with your payments, you’ll not only save your business money, but also the time and stress of being chased by the tax man!
Employees not owed superannuation
As an employer, you don’t have to pay employee super contributions in the following scenarios:
- They are non-residents doing work outside of Australia
- Certain foreign executives working under particular visas or entry permits
- Workers who are paid through the Community Development Employment Program
- Members of the armed forces reserve carrying out work in that role
- Temporary employees who are already covered by a bilateral super agreement (although you do need to retain a copy of their certificate of coverage to verify your exemption)
- You are a non-resident as an employer and you are paying Australian-based employees to do work abroad.
Late payment penalties
If you do pay your super late, the penalty you can expect to cop (the Super Guarantee Charge) looks like this:
- The outstanding amount
- 10 per cent interest on the outstanding amount
- An admin fee of $20 per employee, per quarter
Staying on the right side of the law
In many instances, you can still be penalised for late payment even if your business was not responsible for the delay.
To try and reduce the risk of missing a deadline or inadvertently skipping a payment altogether, consider:
- Using a separate savings account that is solely for paying super contributions
- Maintain a working budget, so the funds are always to hand
- Put the due dates in your calendar, with a reminder a week or two before the deadline
- Be diligent to get super details from new employees on commencement of their employment
- Have staff provide written copies of their super details – don’t rely on verbal or second-hand relays of this information
- If you can’t meet a payment in full, make a part payment to reduce the size of your penalty
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.