The ATO estimates that around $5.2 billion in superannuation guarantee (SG) contributions for the FY2021–22 was not paid on time. This is a major reason why the government wants to introduce Payday Super (PDS).
Thus, on 14 March 2025, the draft legislation to introduce the PDS regime, due to commence from 1 July 2026, was released for industry consultation and feedback.
This article will provide key takeaways that employers, employees and advisers should know.
What will PDS change?
Currently, employer SG contributions must be made on a quarterly basis, otherwise severe penalties apply, as discussed below. However, from 1 July 2026, the proposed changes to the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA) will require employers to pay their employees’ superannuation contributions at the same time as their salary and wages.
The current SG regime requires employers to contribute a percentage of each employee’s ordinary time earnings (OTE) to their chosen superannuation fund on a quarterly basis. The SG rate from 1 July 2025 for the FY2025–26 and subsequent years is 12% of each employee’s OTE (compared to 11.5% for the FY2024–25).
Tighter time frames
If and when passed as law, under PDS, SG contributions must be received by the relevant superannuation fund within seven days of each salary and wage payment for each employee. However, at this stage, there appears to be no improvement to the digital service providers (DSPs) and electronic funds transfer (EFT) and related systems that are required to ensure that the money can be transmitted to the relevant superannuation fund in a timely and reliable manner. Prior to PDS, there is a 28-day period for quarterly contributions to be received. Under PDS, it’s a much tighter seven-day period, which leaves little time to correct errors.
The Retail Employees Superannuation Trust’s (‘REST’ is a large industry superannuation fund that has more than 2 million members and more than $93 billion of assets) submission on the ‘Payday Super – Exposure Draft Consultation’ dated April 2025 stated:
The greatest challenge for employers in meeting the new 7-day contributions payment expectations will be managing the return of contributions from a fund (that is not a stapled fund) that has been unable to accept payment, and then making a new payment within the new timeframes. Employers and their service providers will need to have processes that support a quick turnaround in these circumstances.
We are also aware that some clearing houses that process things like superannuation payments take, on average, seven days to send money and this could be delayed by long weekends and public holidays. Moreover, when the superannuation is received by a superannuation fund, it might take some time to have the amount allocated to a particular fund member. In Davenport and Commissioner of Taxation [2012] AATA 760, for instance, a contribution was not considered to be ‘made’ before 30 June 2008 despite it being received by the fund trustee on 27 June 2008, as the contribution was not allocated to the member until 1 July 2008, which is when the employer remittance slip (dated 27 June 2008) was received. Under SuperStream, super funds currently have 20 days to allocate or return contributions. The PDS proposes to reduce this period to 3 business days. While this 3-day period will assist employers, it could still render them subject to substantial penalties for failing to meet the tight 7-day deadline for superannuation contributions to be made and allocated to an employee in their super fund.
The risks naturally multiply for any given employer with an increased number of employees who may have a multitude of different chosen super funds. Some employees also seek to nominate multiple super funds.
Evidence recently obtained from one employer shows that the time taken was generally between seven and eleven days from approving a superannuation contribution in their payroll software to the amount being received by the relevant fund. This shows that under current systems, many employers are destined to fail under the proposed PDS 7-day deadline. Further, this employer is using one of the most popular accounting and payroll software packages in Australia that is linked to a leading clearing house.
It is therefore not surprising that the Institute of Financial Professionals Australia (IFPA) and a number of other submissions on the draft PDS proposals have recommended that the government adopt a ‘pay date’ (payment-based) model for SG contributions, rather than the proposed ‘due date’ (receipt-based) model. The IFPA submits that this (a receipt-based model, as proposed) creates unnecessary compliance risks for employers, as they may be penalised for delays outside their control.
Based on the above example, without a significant improvement to the current DSPs, EFT and related systems to ensure that there can be substantially quicker transfer of data and payment systems, the proposed PDS deadline of seven days seems unachievable. In particular, employers should not be liable to factors that are outside their control.
Clearing houses
Unfortunately, the current Small Business Superannuation Clearing House (SBSCH) that provides a ‘safe harbor’ under the existing SG regime is proposed to be closed by 30 June 2026. At present, this clearing house provides employers with 19 or fewer employees the certainty (or ‘safe harbor’) to make contributions provided the payment is received by the SBSCH before the 28th day after the end of each quarter. This allows employers to avoid the risk of delays relating to DSPs and the EFT and related systems. There are around 130,000 small employers currently using the SBSCH.
If the SBSCH is closed on 30 June 2026, from 1 July 2026, all employers will generally be subject to a number of system risks including, for example, delays relating to hardware, software or communication systems, unless the employer satisfies the proposed exceptional circumstances exception. Exceptional circumstances are described in paragraph 1.61 of the exposure draft explanatory materials as including natural disasters or widespread communications outages impacting employers making SG contributions on time. The Commissioner will then be empowered to make a determination that a class of employers are affected by exceptional circumstances if prescribed under the regulations.
Considerations for employers
Ideally, employers should consider moving towards a more timely payment method for SG contributions prior to the actual PDS start date. For example, employers paying salary and wages weekly might consider moving to a monthly payroll system.
Note that some employees may be covered by an award, enterprise agreement or employment agreement (Employment Instrument) already requiring their employers to contribute on a more frequent basis than quarterly, as required under the SG system. Employers therefore need to carefully examine whether this is possible under any relevant Employment Instruments covering their employees.
Moving towards a more timely payment period (where salary, wages and SG contributions are being paid monthly rather than weekly or fortnightly) before it is actually required should allow employers to fine-tune paying superannuation at the same time as salary and wages. However, unless the systems are improved, a seven-day deadline will be difficult to achieve.
Transition period
The transition period provided by the government appears to be from the date the legislation is passed as law up to 1 July 2026. This is the only period that the government intends to provide DSPs, payroll providers, financial institutions, superannuation funds, clearing houses and employers time to adjust their systems and processes to accommodate PDS and the increased frequency in SG payments.
Is a 1 July 2026 start date possible?
Whether a 1 July 2026 start date is possible is an interesting question. There is some uncertainty about if, and when, the PDS proposals might be finalised as law given the legislation is still in exposure draft form. Also, assuming the current government is re-elected and successful in having the legislation passed by parliament, finalising the legislation may not occur in sufficient time to enable the systems to be implemented for a 1 July 2026 start date. This position will become clearer after the 3 May 2025 federal election.
In addition, considerable software and system changes are needed to implement PDS. Even if the legislation is finalised in the near future, the current commencement date of 1 July 2026 might still prove difficult. DSPs, clearing houses and EFT and related systems need time to fine-tune and test their updates and systems to ensure that they are working prior to the start of PDS.
Herein lies a dilemma for employers:
- whether they should adopt more timely SG contribution payments sooner (eg, from 1 July 2025) expecting PDS to start from 1 July 2026; or
- whether they shouldthey wait for a concrete start date,
given there is a prospect that the PDS proposals may not be enacted.
Of course, employers who choose to wait may need to implement significant changes under tight deadlines and risk severe penalties if any delays or errors occur.
Employing people in Australia
Australia is known to be one of the most complex countries in the world to hire or engage labour. In certain cases, there are multiple Employment Instruments including awards, enterprise agreements, employment agreements and other instruments, that apply to a given employee. These documents need to be reviewed to determine what is the most appropriate instrument that applies and, within that instrument, what is the appropriate payment to make to a particular employee.
Typically, there may be a range of allowances and other entitlements depending on a multitude of factors that make it difficult for employers to determine the correct amount payable to an employee. In cases where multiple Employment Instruments apply to a single employee, there may also be a range of decisions to make, including the classification, day, time and a range of other variables, in order to determine what is the correct amount to pay that particular employee. It is therefore not that surprising that some well-known large employers have been caught underpaying wages.
There is also the issue of working out who is an “employee” especially when it comes to contractors, and whether a payment is wholly or principally for the labour of a person under s 12(3) SGAA. There are many different definitions that employers (or ‘principals’ that engage an ‘independent contractors’) have to consider and work through to determine whether a worker is a “contractor” or an “employee”, and whether pay-as-you-go must be withheld and whether SG, payroll tax and WorkCover insurance must be paid. Each of these factors is governed by different legislation which uses different definitions. Further, other laws apply to determine whether a worker is an “employee” or an “independent contractor”, eg the Fair Work Act 2009 (Cth), vicarious liability, long-service leave etc.
Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (CFMMEU) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 are two High Court decisions that provided clarity on the employee versus contractor analysis. They focused on a contractual analysis of the rights and obligations established between the parties when determining whether an employee or an independent contractor relationship existed. The High Court essentially confined the prior expansive multi-factorial approach to an analysis of the contract where the terms of the working relationship had been committed to a comprehensive written agreement.
However, the High Court decisions in CFMMEU and Jamsek were removed by the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 (Cth) in February 2024 for the purposes of the Fair Work Act 2009. We discuss this further in an earlier article here: Employee or contractor – new changes to the Fair Work Act – Part 7.
There are considerable and ongoing developments to employment law, including developments relating to contractors, that employers need to keep on top of. The PDS system will add further complexity, especially where many employers do not maintain human resource skills in-house.
If and when PDS commences, employers will need to consider, among other things, the following:
- payroll and related systems, including DSPs, clearing houses and EFT and related systems, will most likely require changes to facilitate the payment of both wages and SG at the same time;
- regular SG payments will require ongoing monitoring to ensure timely and accurate payments to reduce the risk of penalties associated with non-compliance. Any error in calculation will generally need fixing immediately so that any underpayment can be received by the relevant fund within seven days of the salary or wage payment. Naturally, employers will need to manage their cash-flow to accommodate more frequent SG payments; and
- employers need to be certain as to who they need to make SG contributions for. As noted above, there is considerable complexity on how much to pay certain employees and who is considered an employee for SG purposes as some contractors are covered (see our article here for more information: Employee or contractor — SG and the right to delegate — Part 8).
Existing SG penalties prior to PDS
There are a number of penalties for employers who fail to pay their employees’ SG on time. Broadly, where there is an SG shortfall (ie, an employer failing to pay an employee’s SG on time), the charge will be equal to the sum of:
- the SG shortfall amount (based on total salary and wages, not OTE);
- an interest component of 10% per annum;
- a $20 per employee per quarter administrative component; and
- up to a 200% additional penalty —some of this amount may be subject to some remission depending on the facts of each case.
The above amounts are not tax deductible.
Employers must ensure that SG contributions are being paid to the correct superannuation fund. This requires the employer to navigate the choice, default and stapled superannuation fund regime. Failure to pay SG into the correct superannuation fund will result in a 25% choice loading that is subject to a $500 limit per notice period. For more information, refer to our article here: Choice, default and stapled funds — what’s this all about?
From 1 July 2025, the general interest charge (GIC) and shortfall interest charge (SIC) is not tax deductible.
Proposed penalties under the PDS regime
Under the PDS system, if an employer fails to pay an employee’s SG on time, the employer will be required to pay the sum of the following:
- the SG shortfall amount based on OTE;
- the individual notional earnings (in line with GIC rates);
- an administrative uplift (equal to 60% of the sum of the SG shortfall and the notional earnings on the unpaid SG); and
- any choice loading for not meeting the choice of fund requirements. This is capped at the lower of 25% of the SG shortfall subject to a $1,200 limit per notice period (ie, this choice amount is to increase by 240%).
Both on-time and late SG contributions will be tax deductible. However, any applicable GIC, SIC or late payment penalty accrued after 1 July 2025 will not be tax deductible.
The current draft PDS proposals are likely to impose far more severe consequences for employers failing to meet the proposed PDS requirements even if, as outlined above, there is no fault on the employer’s behalf.
Rather than SG penalties being imposed quarterly, employers may be subject to weekly, monthly or more frequent penalties depending on when salary and wages are paid.
Conclusion
Employers and those that engage contractors should be monitoring developments in relation to the PDS system. If and when it is certain that the PDS will become law, employers will need to start planning how they best comply with the PDS system from the prescribed start date or face severe penalties.
Related articles
- Payday Super legislation passed — What employers and advisers need to know ASAP (webinar)
- Payday Super – Part 1: The new law
- Payday Super – Part 2: Not quite “all systems go”
- Choice, default and stapled funds — what’s this all about?
- Employee or contractor – new changes to the Fair Work Act – Part 7
- Employee or contractor — SG and the right to delegate — Part 8
- Is the superannuation guarantee system in need of an urgent overhaul?
* * *
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Daniel Butler, Director ([email protected]), Shaun Backhaus, Director ([email protected]) and Nick Walker, Lawyer ([email protected]).
DBA LAWYERS
14 April 2025
