In an attempt to simplify the SG regime, and reduce the penalties associated with the SGC, the Government has introduced the draft Superannuation Guarantee Legislation Amendment (Simplification) Bill 2015, which if passed, will apply from 1 July 2016.
This article will consider the key amendments proposed, and give some practical examples of the difficulties of applying the SG regime in a real world context.
Background
As the law currently stands, when an employer fails to make superannuation guarantee (‘SG’) contributions on behalf of an employee, they are liable for the superannuation guarantee charge (‘SGC’) which is calculated as follows:
- a shortfall amount determined by multiplying the employee’s total salary or wages (rather than just their ordinary time earnings (‘OTE’)) against the charge percentage (currently set at 9.5%);
- an administration fee of $20 per quarter per employee; and
- interest at 10% on the shortfall amount from the beginning of the quarter in which the contribution was required to be made (ie, 1 January) until the later of the lodgement of a SG statement outlining the shortfall amount or the 28th day of the second month after the end of the relevant quarter (ie, 28 May for the quarter ending 28 March).
Employers may also be liable for:
- a penalty of up to 200% of the SGC amount under Part 7 of the Superannuation Guarantee (Administration) Act 1992 (Cth) (‘SGAA’);
- a penalty of up to 100% under the Taxation Administration Act 1953 (Cth) (‘TAA’);
- a choice of fund penalty up to $500 per quarter per employee; and
- an amount equal to the SGC personally if the Commissioner of Taxation (‘Commissioner’) issues a director penalty notice.
These penalties can apply irrespective of whether the failure to make SG contributions was an inadvertent mistake or misunderstanding in applying complex legislative provisions (eg, in determining whether a contractor is engaged under a contract that is principally for their labour, such that SG contributions are required to be made on behalf of that contractor), or deliberate avoidance (although the Commissioner may remit certain applicable penalties where the employer is genuinely attempting to comply with their SG obligations, and otherwise has a good compliance history). The Commissioner does not have discretion to remit the SGC.
Key changes
The key changes proposed in the draft legislation include:
- Altering the basis for calculating the SGC from salary or wages to ordinary time earnings (‘OTE’), which is the basis for calculating ordinary SG contributions.
As the law currently stands, employees may receive a windfall where the components of their salary or wages includes amounts that do not form part of their OTE, for example, amounts referrable solely to overtime.
While this change will not affect the majority of employees who receive salary or wages for performing their ordinary hours of work (and therefore, their salary or wages are equal to their OTE), the examples below highlight some of the complexities that commonly arise when employers attempt to remunerate employees via allowances and bonuses.
- Aligning the period interest is payable on the SGC with the period for which the SGC is owing.
The notional interest at 10% is designed to compensate employees for receiving their SG contributions (via contributions to a complying superannuation fund) later than would otherwise have been the case if the employer made SG contributions on behalf of its employees within 28 days of the end of the relevant quarter.
Currently, interest at 10% is calculated from the commencement of the relevant period for which there is a shortfall. This means that while the shortfall doesn’t arise until 28 days after the end of the relevant quarter, interest accrues from the first day of the relevant quarter, for example, for the June quarter, an SGC shortfall arises after 28 July, while interest on the shortfall amount is calculated from 1 April. If the draft legislation is passed in its current form, interest will instead accrue in line with the date the shortfall arises, being 29 July in the example above.
- Removing the ‘Part 7’ penalty imposed under the SGAA, which as outlined above is up to 200% of the SGC.
The remaining penalties, including the 100% penalty imposed under the TAA, will continue to apply.
While these amendments to the operation of the SGC, if passed, will provide some welcome relief for employers, the non-deductibility of the SGC remains unchanged, and the provisions are still likely to be complex to administer and result in inadvertent errors around the definition of OTE.
In the examples below, we consider some of the remuneration structures that commonly trip up employers in our experience.
Case study 1 – OTE
Consider the following example:
Facts
Eliza is employed as a business development manager in a professional firm. In addition to her salary, she receives a car and phone allowance that Eliza’s employer expects will be fully expended in the course of carrying out her duties as an employee. Eliza also receives an entertainment allowance for use while networking with current and potential clients. Eliza’s employer pays a fixed amount each month irrespective of the amount incurred by Eliza in entertaining clients, which may be more or less than the actual entertainment allowance.
Eliza is required to work significant overtime to deliver a project and in appreciation of her service, her employer pays her a bonus referrable solely to her overtime.
Eliza also receives a bonus at Christmas in recognition of her exceptional service over the course of the year.
Her employer queries what amounts fall within the definition of OTE under the SGAA.
What amounts are included in OTE?
The following amounts will fall within the definition of OTE:
- Ordinary salary – as Eliza receives a salary for performing her contracted services during her ordinary hours of work, her salary falls within the definition of OTE.
- Christmas bonus – as Eliza’s bonus at Christmas is in substance a reward for her service throughout the year in respect of her ordinary hours of work, the Christmas bonus will fall within the definition of OTE.
- Entertainment allowance – this allowance falls within the definition of OTE as it is not necessarily fully expended in the course of providing services to the employer.
The following amounts may or may not fall within the definition of OTE:
- Phone and car allowance – if Eliza’s employer expects that each allowance will be fully expended by Eliza in the course of providing the services for which she is employed, and there is a reasonable basis for this expectation, supported by objective evidence of the likelihood of this allowance being fully expended, then the relevant allowance will not fall within the definition of OTE and accordingly, SG contributions are not required to be made in respect of these allowances.
This view has been confirmed by the Commissioner in Superannuation Guarantee Ruling SGR 2009/2 – Superannuation guarantee: meaning of the terms ‘ordinary time earnings’ and ‘salary or wages’ (‘SGR 2009/2’), which states at paragraph 72 that:
Expense allowances, that is, those allowances paid to an employee with a reasonable expectation that the employee will fully expend the money in the course of providing services, are not ‘salary or wages’.
Therefore, as the allowance does not comprise salary or wages, the allowance also falls outside the definition of ordinary time earnings, and Eliza’s employer will not have a shortfall if it does not make SG contributions in respect of this amount.
The following amount is unlikely to fall within the definition of OTE:
- Bonus referable solely to overtime – where Eliza has specified ordinary hours of work under her employment contract, and a genuine distinction is drawn between ordinary hours of work and additional hours (ie, a higher rate of pay for such additional hours as required), and the bonus received is solely referrable to overtime, then the bonus will not fall within the definition of OTE, and SG contributions are not required to be made in respect of this amount.
This view has been confirmed by the Commissioner in SGR 2009/2, which states at paragraphs 28 and 29 that:
a discrete and clearly identifiable bonus payment may relate solely to work performed entirely outside ordinary hours. For example, an employer may pay a bonus specifically to recognise a special project that an employee contributed to entirely in non-ordinary hours.
There would need to be clear evidence that this was the sole basis for the payment. The more common case of a lump sum performance bonus that is at least partly referable to results achieved in ordinary hours of work is wholly OTE.
Case study 2 – termination of employment
Consider the same facts as above, but Eliza has now decided to resign from her position to travel overseas for 12 months.
Eliza receives the following amounts on termination of her employment:
- 4 weeks’ salary in lieu of notice;
- unused annual leave; and
- unused long service leave (‘LSL’).
In this scenario, unused annual leave and LSL are specifically excluded from the definition of OTE. The payment in lieu of notice however, is effectively salary that Eliza was entitled to receive during the notice period. While her employer does not require Eliza to work out her notice period, the payment is effectively made in respect of ordinary hours of work and therefore, falls within the definition of OTE.
Therefore, Eliza’s employer is required to make SG contributions in respect of the amount of the payment in lieu of notice within 28 days after the end of the relevant quarter to avoid a shortfall and the imposition of the SGC.
Contractors
Another area that gives rise to significant disputes is whether a contractor is in fact an employee for SG purposes. If a contractor is in fact a common law or deemed employee under the SGAA, the SGC is typically payable on the total fees received by the contractor for the services performed as a contractor will generally not have specified hours of work. Therefore, the total hours worked will generally comprise the contractors ordinary hours of work.
Thus the definition of OTE is crucial in determining what amounts are payable to contractors who are in fact, employees for the purposes of the SGAA. (Refer to our article below for further guidance on determining whether a contractor should be treated as an employee for the purposes of the superannuation law).
Conclusion
From the examples above, it is clear that determining what falls within the definition of OTE remains complex and the various amounts paid to employees can be difficult to characterise depending on the circumstances. While the new legislation goes some way to simplifying the operation of the SG regime, there remains significant complexity and scope for error.
We have recently been involved with drafting a submission to the Government through the Superannuation Committee of The Taxation Institute on the proposed amendments to the SGC, so we are well placed to assist if you would like further information on these matters.
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