Superannuation Guarantee (SG)

The Superannuation Guarantee (SG) is a compulsory system of superannuation support for Australian employees, paid for by employers.

 
Overview
 
The Superannuation Guarantee is a compulsory system of superannuation support for Australian employees, paid for by employers. This system is governed by federal legislation, Australian Taxation Office tax rulings, and the provisions of modern awards.
 
Under this system, employers pay 9.5% of the ordinary time earnings of their employees (including part-time and casual employees) who are aged over 18, and who are paid $450 (before tax) a month, into a complying superannuation fund or retirement savings account. The rate will continue to rise over the next few years — as noted in table below.
 
Employers who do not pay the correct superannuation contributions by the due date must pay the superannuation guarantee charge.
 
Employer questions on this subject would appear to fall into four broad categories:
  • what categories of employee are eligible (or not eligible) for employer superannuation contributions?
  • what types of payments are included in an employee’s ordinary time earnings for the purposes of calculating the employer superannuation contribution?
  • what is the effect of a special employment arrangement on the calculation of employer superannuation contributions, such as a salary sacrifice arrangement?
  • what is the interaction, if any, between award/agreement provisions and the Superannuation Guarantee legislation?
Legislation
 
The Superannuation Guarantee (Administration) Act 1992 [Cth] is the primary legislation affecting employers and details the administrative arrangements for the operation of the Superannuation Guarantee cheme, including assessment of the employer’s liability, calculation of the charge, payment of the charge and distribution of payments received.
 
The Superannuation Guarantee Charge Act 1992 [Cth] imposes a charge on employers who do not provide the required level of superannuation payments for employees.
 
The legislation is administered by the Australian Taxation Office.
Amount of Superannuation Guarantee contribution
 
Contributions for the quarter (September, December, March and June) must be paid to the employee’s fund by the 28th of the month following the end of each quarter to avoid a superannuation guarantee charge.
 
From 1 July 2014
 
For the year commencing 1 July 2014, the minimum superannuation guarantee contributions required to be made for an employee is 9.5%.

In the Federal Budget on 13 May 2014, it was announced that the minimum Superannuation Guarantee contribution will remain at 9.5% until 30 June 2018. The Australian Taxation Office advises the charge percentage will remain at 9.5 per cent until June 2021.
 
From 1 July 2013, salary and wages are taken into account regardless of the age of an employee (previously employees aged 70 years and over could not benefit from Superannuation Guarantee contributions unless otherwise specified by the applicable industrial instrument). This means that the age of an employee will generally have no effect on an employer’s Superannuation Guarantee obligations.
 
The only age-based exception from 1 July 2013 is that Superannuation Guarantee contributions do not need to be made for an employee aged under 18 years and working fewer than 30 hours in a week.
 
Liability to pay SGC
 
Where an employer does not make the required superannuation contributions each quarter in respect of an employee under the Superannuation Guarantee Act, the employer will be liable for a superannuation guarantee charge. The Charge consists of:
  • the percentage difference between the amount of actual contributions made by the employer and the amount of contributions the employer should have made multiplied by the employee’s salary or wages (which is a broader concept than an employee’s ordinary time earnings), plus
  • an interest component (that is currently 10%), plus
  • an administration component (that is currently $20 per employee per quarter).
The Superannuation Guarantee Charge is a liability owed to the Australian Taxation Office and is separate from any legal obligations owed to an employee under a contract of employment. The Superannuation Guarantee Charge is not tax deductible whereas superannuation contributions are normally tax deductible.
 
Employers should be aware that legislative changes to enhance protection of superannuation entitlements for employees came into effect on 30 June 2012. See The Tax Laws Amendment (2012 Measures No.2) Act 2012 [Cth]. These changes impose personal liability on company directors for their company’s unpaid Superannuation Guarantee Charge in certain circumstances. However, a director may defend personal liability in circumstances where the company treated the Superannuation Guarantee Act as applying to a matter in a way that was reasonably arguable and the company took reasonable care in applying the Superannuation Guarantee Act to the matter.

Employer

 
With a few exceptions, the Superannuation Guarantee scheme applies to all employers in respect of their full-time, part-time and casual employees. This includes:
  • non-resident employers who have employees working in Australia
  • Commonwealth and tax-exempt Commonwealth authorities
  • tax exempt organisations
  • family companies and
  • trusts paying salaries or wages.
An employer has Superannuation Guarantee obligations if the employer:
  • is responsible for paying salary or wages to another individual on a full-time, part-time or casual basis
  • makes payments to an individual under a contract that is wholly or principally for labour
  • makes payments to an individual for the performance of duties as a member of the executive body (whether as a board of directors or otherwise)
  • makes payments to a person to perform or present, or to participate in the performance or presentation of, any music, play, dance, entertainment, sport, display or promotional activity or any similar activity involving the exercise of intellectual, artistic, physical or any other personal skill; or
  • makes payments to a person for performing services in or in connection with the making of any film, tape, disc or any media broadcast.
 
Exemptions
 
An employer is not required to provide superannuation contributions for the following categories of employees:
  • employees receiving a salary/wage of less than $450 (before tax) in a calendar month
  • employees under 18 years of age working less than 30 hours per week
  • non-resident employees paid for work done outside Australia
  • resident employees paid by non-resident employers for work done outside Australia
  • employees receiving salary and wages under the Community Development Employment Program
  • some foreign executives holding certain visas or entry permits under the under the Migration (1993) Regulations
  • employees paid to do work of a domestic or private nature for not more than 30 hours a week, (eg part-time nanny or housekeeper)
  • members of the army, navy or air force reserve for work carried out in that role
  • employees temporarily working in Australia who are covered by a bilateral social security agreement – employers are required to keep a copy of the employee’s certificate of coverage to verify the exemption, and
  • resident employees of non-resident employers for work they do outside Australia.
Since 1 July 2013, an employee’s age is not relevant in determining an employer’s liability to make Superannuation Guarantee contributions, the one exception being that contributions do not need to be made for an employee aged under 18 and working only part-time.  Before 1 July 2013, an employer was not required to make Superannuation Guarantee contributions for an employee who was aged 70 or over.

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Contractors
 
A person who receives payment for work under a contract which is wholly or principally for their labour is an employee for Superannuation Guarantee purposes.
 
If the contract is not wholly or principally for labour (including physical work and intellectual and artistic efforts), then the person providing the services is treated as an independent contractor rather than an employee, and the employer is not required to provide superannuation support.
 
A contract is principally for labour if more than half the value of the contract is for labour. In the Australian Taxation Office’s view a contractor, as distinct from an employee, is someone who:
  • is contracted to perform a specific task within a specified time frame for an agreed amount of moneyhas freedom in the way the task is performed
  • may have the labour performed by another person
  • normally renders accounts payable by invoice
  • does not have the normal entitlements of employees such as long service leave, annual leave, and sick leave etc
  • bears the responsibility and liability for losses
  • is generally not eligible for workers compensation from the principalis generally available to perform services for the public at large.

An employer who fails to make the required contributions may be liable to Superannuation Guarantee charge and other penalties. If the individual has been claiming a tax deduction for personal superannuation contributions, the Tax Office may issue amended assessments (going back two years) to the individual cancelling the deductions. Penalties may be imposed on the individual for the underpayment of tax resulting from the claiming of the deductions.

The Tax Office approach, including the circumstances in which penalties will be remitted, is set out in ATO Practice Statement Law Administration PS LA 2006/14 (18 October 2006).

Case law
 
The importance of ensuring that employers make Superannuation Guarantee Act contributions in respect of all persons who are common law employees or deemed employees under the Superannuation Guarantee Act was highlighted by some recent decisions which held that an employer incorrectly characterised translators and casual call centre staff as contractors rather than employees. See On Call Interpretation & Translations Agency Pty Ltd v Commissioner of Taxation (No.3) [2011] FCA 366; Roy Morgan Research Pty Ltd v Commissioner of Taxation [2010] FCAFC 52.
 
Independent agencies
 
Where a person’s employment is arranged through an independent agency, the Australian Taxation Office’s view is that:
  • in a service firm situation, eg a security firm that provides a security guard to its client, the worker is a common law employee of the service firm, not of the user client
  • in a labour hire situation, eg an organisation providing temporary workers such as typists to its clients, the labour hire firm is the employer of the worker
  • in an employment agency situation, ie commission agent, the user client is the employer of the worker, not the employment agency.
Ordinary time earnings
 
The Superannuation Guarantee Ruling 2009/2 provides the definition of ordinary time earnings for the purposes of calculating employer superannuation contributions with respect to employees under an industrial instrument. An employee with a definition of ordinary time earnings under their individual contract of employment that provides a more beneficial outcome with respect to employer superannuation contributions will prevail over the Superannuation Guarantee Ruling. SGR 2009/2 applies to payments made to employees in the quarter commencing 1 July 2009 and all later quarters. The Ruling replaces previous superannuation guarantee rulings SGR 94/4 and SGR 94/5. The table of payments is as follows:
 
Amounts INCLUDED
 
Over award payments; shift loadings; commission payments; allowances or loadings related to an employee’s work, eg casual loading, site allowance, dirt allowance, freezer allowance, danger allowance, retention allowance, etc; bonuses related to ordinary hours of work, eg performance bonus, bonus labelled as ‘ex-gratia’ but in respect of ordinary hours of work, Christmas bonus; piece rates; paid leave and holiday pay; lump sum arrears payments of unused leave or salary and wages (other than on termination); payments in lieu of notice; workers compensation (returned to work); directors’ fees.
 
Amounts EXCLUDED
 
Overtime payments; lump sum payments on termination, eg payment in lieu of unused sick leave, annual leave or long service leave payments; on call or availability allowance (except doctors); paid parental leave or other kinds of ancillary leave; leave loadings; ‘top up’ payments, eg jury service payments, defence reserve forces; private or domestic work under 30 hours per week; fringe benefits and other non-cash payments; some workers compensation payments (not working); expense allowance payments and reimbursement of expenses incurred by the employee; redundancy payments; payments for unfair dismissal.
 
Ordinary hours of work
 
The SGR 2009/2 provides the following with respect to an employee’s ordinary hours and ordinary time earnings:
  • Overtime may constitute ordinary time earnings if the earnings relate to an employee’s ordinary hours of work. An employee’s ‘ordinary hours of work’ are the hours specified as his or her ordinary hours of work under the relevant award or agreement, or under the combination of such documents, that governs the employee’s conditions of employment.
  • If an employee’s ordinary hours of work are not specified in a relevant award or agreement, then the employee’s ordinary hours of work are the ‘normal, regular, usual or customary hours’ worked by the employee, as determined in all the circumstances. This requires an employee-by-employee analysis.
  • Where it is not practicable to determine an employee’s regular, usual or customary hours of work, the employee’s ordinary hours of work will be the actual hours worked by the employee. This may increase the cost of superannuating employees who are not covered by an award or agreement detailing the employee’s ordinary hours of work.
  • A bonus is regarded as ordinary time earnings in most cases. Only ‘a discrete and clear identifiable bonus payment that relates solely to work performed entirely outside ordinary hours will not constitute ordinary time earnings’. Even ex gratia bonuses that are not expressly linked to performance, such as Christmas bonuses, are considered ordinary time earnings.

Maximum contribution base

 
The legislation prescribes a maximum amount upon which the employer superannuation contribution is calculated (for the financial year 2015/16, $50,810 per quarter). For example, an employer in 2016 who pays an employee a salary of $60,000 in a quarter is only required to make quarterly Superannuation Guarantee contributions calculated at 9.5% of $50,810. (For the financial year 2014/15, the maximum contribution base was $49,430 per quarter.) The Australian Taxation Office provides both the history of rates and current information.
 
 
Salary sacrifice arrangements — guidelines
 
A common question from employers relates to the amount of salary/wages an employee can sacrifice into the relevant superannuation fund and the effect the lower salary/wage has on the Superannuation Guarantee employer superannuation contribution. Employers should be aware that the aim of a salary sacrifice arrangement is to provide higher net remuneration benefits to the employee at no additional cost to the employer.
 
There is no statutory restriction to an employee sacrificing up to 100 per cent of their salary/wage, however, the Fringe Benefits Tax (Assessment) Act and the Income Tax Assessment Act, together with the taxation status of the employer, dictate how each benefit is treated for taxation purposes. The FBT legislation significantly limits the tax savings that can be made by salary sacrifice. The provision of fringe benefits to an employee generally costs the same as cash salary.
 
For a fringe benefit to be more cost effective than the equivalent cash salary, the following requirements must be met:
  • the ‘net cost’ to the employer of providing the benefit must be the same or less than the after-tax cost of paying the equivalent cash salary; and
  • the value of the benefit to the employee must be the same or greater than the ‘equivalent net salary’ which would have been received had the employee taken cash instead.
Both these requirements are largely affected by the taxation status of the employer and employee.
 
Employment law generally allows for the implementation of a salary sacrifice arrangement, by agreement, provided the employee would have received at least the appropriate minimum wage rate under the appliacble modern award or enterprise agreement if the salary sacrifice arrangement was not in place.
Calculation of Superannuation Guarantee — salary sacrifice
 
The amount of Superannuation Guarantee required to be paid by the employer is calculated on the employee’s earnings base (usually ordinary time earnings). As entering into a salary sacrifice arrangement reduces the employee’s earnings base, it will reduce the amount of Superannuation Guarantee required to be paid by the employer. The terms of some awards, agreements or individual contracts of employment, may require an employer to calculate the Superannuation Guarantee on the employee’s ‘pre-sacrifice’ salary or wage. Whether the employer calculates the 9.5 percent Superannuation Guarantee on the pre-sacrifice or post-sacrifice salary or wage may influence an employee’s decision to agree to enter into an salary sacrifice arrangement with their employer.
Cashing out leave to superannuation
 
In agreeing to the cashing out of annual leave, personal/carer’s leave, or long service leave in the appropriate manner (via a workplace agreement), an employer may be asked by the employee whether the cashed out amount can be paid into the employee’s superannuation fund as a salary sacrifice arrangement. A salary sacrifice arrangement can only apply prospectively. Leave that is already accrued cannot be salary sacrificed. If an employee cashes out accrued leave then the employee can opt to put it into their super fund by arranging this with the fund, but there is no obvious salary sacrifice advantage in doing so.
 
Awards/enterprise agreements
 
Employers must comply not only with the superannuation guarantee rules, but also with superannuation requirements in a modern award or registered agreement.
 
From 1 January 2014, a modern award must include a term requiring an employer covered by the award to make Superannuation Guarantee contributions to a superannuation fund for the benefit of an employee covered by the award (Fair Work Act 2009 sec 149B). A modern award also includes a “default fund term” that applies where an employee does not choose a superannuation fund to which the employer should make Superannuation Guarantee contributions for the employee. The default fund term requires the employer to contribute to a superannuation fund that offers a MySuper product and that is specified in the award.
 
Where an industrial instrument has superannuation entitlements more beneficial than those prescribed by the Superannuation Guarantee legislation, the employer must comply with the award or agreement.
 
There may be some important differences between what is required under the Superannuation Guarantee legislation and the award or agreements. For example:
  • different employees may be exempted from the two regimes
  • the earnings base may differ, eg in relation to casual employees
  • the frequency of payments and age limits may vary.
Modern awards
 
The Fair Work Act (s139) prescribes those terms that may be provided in a modern award, including superannuation. Some modern awards contain an additional provision dealing with superannuation contributions during periods of paid leave or while an employee was absent from work due to injury or work-related illness, although it does not form part of the ‘standard’ clause. For an example of such a provision, see Manufacturing and Associated Industries and Occupations Award 2010. The rights and obligations of the award provisions supplement those in the federal superannuation legislation.
 
Monthly ordinary time earnings threshold

A modern award may also prescribe a lower monthly ordinary time earnings threshold for casual employees than the Superannuation Guarantee legislation. For example, the Restaurant Industry Award 2010 provides that an employer must make contributions to the appropriate super fund if an employee earns at least $350 in a particular month ($450 in a particular month under Superannuation Guarantee legislation).

‘Standard’ award clause
 
The superannuation clause of a modern award may include the following matters:
  • federal superannuation legislation — a reference to the federal Superannuation Guarantee legislation and that an individual employee generally has the opportunity to choose their own superannuation fund. If an employee does not choose a superannuation fund, any superannuation fund nominated in the award covering the employee applies;
  • employer contributions — an employer must make such superannuation contributions to a superannuation fund for the benefit of an employee as will avoid the employer being required to pay the Superannuation Guarantee Charge under superannuation legislation with respect to that employee;
  • voluntary employee contributions — subject to the governing rules of the relevant superannuation fund, an employer may, in writing, authorise their employer to pay on behalf of the employee a specified amount from post-taxation wages of the employee into the same superannuation fund as the employer makes Superannuation Guarantee contributions. An employee may adjust the amount the employee has authorised their employer to pay from the wages of the employee from the first of the month following the giving of three months written notice to their employer. The employer must pay the authorised amount no later than 28 days after the end of the month in which the authorised deduction was made;
  • superannuation fund — unless the employer is required to make contributions to another superannuation fund that is chosen by the employee, the employer must make the superannuation contributions to a fund prescribed by the award, eg the Clerks — Private Sector Award 2010 prescribes six named superannuation funds, or any superannuation fund to which the employer was making superannuation contributions for the benefit of its employees before 12 September 2008, provided the superannuation fund is an eligible choice fund
  • a requirement that employer superannuation contributions continue during a period of paid leave or a period of absence on workers compensation (usually a maximum of 52 weeks).
Modern awards came into operation from 1 January 2010.

 

Choice of fund
 
Who must be offered choice?
 
According to the Australian Taxation Office, employees can generally choose the superannuation fund to receive the SG contributions made for them by their employer if they are:
  • employed under a modern award
  • employed under a former state award, ie. a NAPSA
  • employed under another award or agreement that does not require superannuation support, or
  • not employed under any state award or industrial agreement (including contractors paid principally for their labour).
Certain employees may not be eligible to choose their super fund. In general, these are employees whose employer pays superannuation for them under:
  • a state industrial award
  • a preserved state agreement
  • a federal industrial agreement such as an Australian Workplace Agreement
  • a pre-reform Australian Workplace Agreement, pre-reform certified agreement, collective agreement
  • an old IR agreement
  • an Individual Transitional Employment Agreement
  • a workplace determination or enterprise agreement
In addition, employees who are in certain types of defined benefit fund or who have already reached a certain level in a defined benefit fund are not eligible. Some federal and state public sector employees are also excluded.
 
How does an employer comply with choice of fund?
 
An employer will most commonly comply with the choice of fund rules by making Superannuation Guarantee contributions in one of the following ways:
  • to a fund chosen by the employee when the employee gives written notice to the employer; or
  • to a fund chosen by the employee after being given a standard choice form by the employer; or
  • to a default fund chosen by the employer after the employee fails to make a choice under either of the above two options.
Choice of fund at employee’s initiative
 
An employee may initiate the choice process by giving the employer a written notice proposing a particular complying superannuation fund or Retirement Savings Account as the employee’s chosen fund.
 
An employer is not required to contribute to a fund chosen by an employee if the employer would be required to continue to finance that employee’s rights to receive a full retirement, retrenchment or resignation benefit in a defined benefit scheme.
 
An employer may reject a fund if chosen by an employee if the employee does not provide written evidence of contract details of the fund, as well as:
  • written evidence from the fund that it will accept contributions made by the employer for the benefit of the employee, and
  • information about how the employer can pay the contributions, eg details for an electronic transfer or a postal address if by cheque.
An employee also has to give an employer a written statement from the trustees of the fund that the fund is a complying supereannuation fund.
 
If the employee chooses a self-managed superannuation fund, the employee must provide documentation from the Australian Taxation Office confirming the fund is a regulated superannuation fund. This written statement allows the employer to assume the fund is complying and protects the employer from being penalised for contributing to a non-complying fund.
 
An employer may refuse to accept a fund chosen by the employee if the employee has chosen another fund in the previous 12 months.
 
If the employer rejects the employee’s choice, the employee can make a written request to the employer for a standard choice form, allowing the employee to make a further choice. The employer must provide the form within 28 days of receiving the request, unless the employer has given the employee a form within the last 12 months.
 
Choice of fund at employer’s initiative
 
An employer must give a standard choice form to an employee, and thereby initiate the choice of fund process, unless the employee has chosen a fund by the time the employer would have otherwise be required to give a form. An employer may provide a choice form on paper electronically, or via email if that is the normal manner of communicating with employees. An employer does not have to use the official form, although any alternative form must contain all the information in the prescribed Tax Office form. An employer may also provide photocopies of the approved form to employees.
 
The times by which an employer must provide a standard choice form are:
  • within 28 days of the employee first commencing employment with the employer;
  • within 28 days of an employee request for a form (but not if the employee has been given such a form within the last 12 months); and
  • within 28 days of the employer becoming aware that there ceased to be a chosen fund for the employee because of the employer being unable to contribute to a particular fund or because the fund has ceased to be an eligible choice fund.
An employer does not have to provide a form to an employee who has already chosen a fund or if the employer is already satisfying choice of fund in other ways.
 
Employer’s obligation if employee does not choose a fund
 
If an employee does not choose a fund, the employer may contribute to a default fund of the employer’s choice. The name of the default fund will have been set out on the standard choice form given to the employee.
 
The fund chosen by the employer must provide insurance to cover the employee’s death. The minimum insurance to be provided by the default fund is set out in the regulations.
 
If an employer’s nominated superannuation fund does not offer minimum life insurance for members, the employer will need to arrange insurance either with another superannuation fund or with an insurance provider.
 
Default contributions by employers covered by a modern award can generally only be made to a default fund specified in the award. A superannuation fund can only be named in a modern award if it offers a MySuper product.
 
MySuper products are simple, low cost products with a single investment strategy and with fees restricted to those set out in the legislation, eg exit fees and switching fees are limited to cost recovery.
 
The Fair Work Commission is responsible for the selection and ongoing assessment of superannuation funds eligible for nomination as default funds in modern awards.
 
Liability for damages
 
An employer is not liable for any loss or damage arising from anything done by the employer in compliance with the choice of fund rules. If, for instance, an employee selects a fund from material provided by a superannuation fund and the fund subsequently performs badly, the employer would not be liable to compensate the employee.
 
Inducements offered to employer
 
The trustee of a superannuation fund is generally prohibited from offering inducements in the form of goods or services to an employer in return for the employer arranging for employers to be members of the fund. Anyone who suffers loss or damage as a result of such action by the trustee will be able to recover against the trustee, but not against the employer. There are some exceptions to the prohibition on inducements.
 
Tax issues
 
A ‘choice penalty’ is imposed on an employer who does not comply with the choice of fund rules for an employee. The ‘choice penalty’ is paid to the Australian Taxation Office which distributes it to the employee’s superannuation fund account. The amount of choice penalty for an employee is limited to $500, either for a particular quarter or for a notice period, which can consist of multiple quarters.
 
Payment in lieu of notice on termination
 
As a result of the ATO Ruling SGR 2009/2, payments in lieu of notice of termination attract the 9.5 per cent Superannuation Guarantee calculation. This means that, in this circumstance, the employer would be required to pay the employee compensation for the Superannuation Guarantee by paying the 9.5 per cent Superannuation Guarantee into the employee’s elected superannuation fund.
 
Time and wage records/pay slips
 
If an employer is required to make a superannuation contribution for the benefit of an employee, other than a contribution in respect of a defined benefit interest, the Fair Work Regulations 2009 [Cth] require that the employer’s record relating to the employee contain the following information:
  • the amount of the contribution
  • the period over which the contribution was made
  • the date or dates on which the contribution was made
  • the name of the fund to which the contribution was made
  • the basis on which the employer became liable to make the contributions, including any election made by the employee as to the fund to which the contribution was to be made and the date of any relevant election.
An employer must also issue to that employee, within one working day of paying an amount to an employee for the performance of work, a pay slip relating to each remuneration payment by the employer to the employee. If the employer is required to make superannuation contributions, other than a contribution in respect of a defined benefit interest, for the benefit of the employee, the payslip must include details of:
  • the amount of each contribution made, or which the employer was liable to make, for the benefit of the employee during the period to which the payslip relates
  • the name of any fund to which that contribution was or will be made.
The government has proposed draft legislation that will also require employers to report on payslips the date on which the employer expects to pay the contributions that relate to the relevant pay period. While these changes will not apply to employees who are members of defined benefit funds, employers will need to report any contributions to the accumulation division of a hybrid fund.
 
A pay slip must be provided in electronic form or hard copy. An employer is required to keep employment records for each employee for seven years. The records must be legible and readily available to a Fair Work inspector.

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