The current issues relating to whether employers have or have not paid the superannuation guarantee (SG) and the alleged rorts that have developed may not be as clear as they seem.
The issue around whether the correct amount of superannuation has been paid by an employer and whether they have complied with the relevant employment contract or industrial agreement are two completely different issues. One is about a taxation law and the other is about contracts for a person’s labour.
The Superannuation Guarantee (Administration) Act 1992 (SGAA) technically imposes a tax on employers equal to the SG percentage, currently equal to 9.5 per cent of a person’s ordinary time earnings. The amount is reduced if the employer contributes the appropriate amount to a complying superannuation fund or that the employer believes is complying. The source of the payment is generally not the concern of the SGAA and it is a question of fact as to whether the contribution has been made to the fund by the employer or other qualified entity.
There are many ways in which employment agreements or industrial agreements can operate. One way is to put in place a contract that is on an employee cost basis. The contract will set out the terms of employment and payment of a gross package amount. As part of the agreement, an appropriate amount of the package equal to the SG percentage is required to be paid to super. This is the equivalent of salary sacrificing up to the SG amount as part of the gross package. In addition to the SG amount, the agreement may also allow the employee to salary sacrifice additional amounts to super or for other employer-provided benefits.
To illustrate this point, let’s assume Naomi commences employment on a salary package of $140,000, which requires her employer to contribute to super an amount equal to the SG percentage of 9.5 per cent. This means Naomi will be paid an annual salary of $127,854 and $12,146 (9.5 per cent of the paid salary) will be contributed to superannuation by the employer.
Another type of arrangement is that a person’s salary and wages may be determined by the employment agreement and, in addition, the employer will contribute an amount equal to the SG percentage calculated on the basis of the person’s paid ordinary time earnings. In some cases, the amount paid to the superannuation fund by the employer will set the amount of the notional salary to be used in calculating the amount of the contribution. In addition to the super contributions made as part of the employer’s mandatory obligation, the contract may also permit the employee to salary sacrifice an additional amount to superannuation.
To illustrate the second arrangement, let’s consider Stephen, who is 40 and will receive an annual salary of $130,000 plus superannuation. This will require the employer to contribute an amount equal to 9.5 per cent of the annual salary, which is $12,350. However, the downside is that if Stephen wishes to salary sacrifice an additional amount to superannuation, for example, $10,000, the employer is required to contribute only an amount to super based on the amount of paid salary of $120,000. Therefore, the SG liability based on the lower salary will be $11,400. As $10,000 will be contributed to super by the employer as part of the employee’s salary sacrifice arrangement, the employer will be only required to contribute an additional amount of $1400 to meet their SG liability.
This illustrates it may be appropriate in these circumstances that any employment arrangement sets a notional salary to be used for mandatory super contributions from an industrial point of view.
While these examples may point out some of the deficiencies that exist with the SG system, there are probably more basic issues to be appreciated. The main issues appear to be a lack of understanding of who is an employer or an employee for SG purposes, as well as the calculation of ordinary time earnings.
In this regard, contractors who provide mainly their labour are particularly at risk in situations where they are engaged directly, rather than via an interposed entity such as a company or trust. They may qualify as ‘employees’ for SG purposes and the employer may have a liability to pay super.
This was brought to the fore many years ago in the High Court with a number of cases involving bicycle couriers and their terms of engagement being one of employment.
Worse still are those employers who by accident or otherwise fail to pay any superannuation for their employees or deduct amounts from an employee’s salary and do not pay it to the super fund. In effect, this may be an industrial issue to be solved in addition to the consequences under the SG legislation.
While SG obligations may not seem to have any issues with SMSFs, employees who exercise their choice of fund as an SMSF for superannuation purposes may be affected by employers who do not fulfil their obligations under the superannuation and labour law.