Avoiding a fall-out from super guarantee increase

A worrying amount of employers are planning to reduce take-home wages to offset the higher super guarantee, research finds.

In an interview with ABC’s 7.30 for The Future of Retirement series earlier this year, Australia’s 24th Prime Minister Paul Keating, who famously introduced the compulsory employer contributions to superannuation in 1992, argued the ideal level of compulsory superannuation contributions is 15 per cent.

“Particularly now, as earnings – yields from shares, yields from equities, and bond yields – have fallen so far, there’s no way a funded 9.5 per cent can give you the kind of accumulation I believe you need. So the answer is 15,” he told host Alan Kohler.

While we haven’t yet reached the 15 per cent mark (except for some government employees who receive 15.4 per cent), there has been some upward movement due to recent changes announced in the recent federal budget.

The mandatory superannuation contribution will increase from 9.5 to 10 per cent by 1 July, with the super guarantee continuing to climb by half a per cent each year to reach 12 per cent by 2025.

As the higher compulsory superannuation rate falls on the shoulder of employers, it’s worth exploring what impact this change will have for HR and payroll teams. HRM spoke to Tracy Angwin, CEO of the Australian Payroll Association, to elucidate the significance of the super increase.

Angwin says her organisation has already been fielding numerous calls from employers enquiring about how to avoid the super guarantee increase.

“Throughout the pandemic small businesses have been badly impacted, so they are watching every penny,” says Angwin.

“Even though legally you could have the base salary absorb the super, it’s not in the spirit of the legislation change, so I would encourage employers to reconfigure salaries so they can keep the base rate the same, and meet the 10 per cent super requirements.”

Slashing take-home pay also runs the risk of harming workplace morale and culture, with the potential flow-on effect of losing valuable employees.

Given the current labour shortage, a reduction in skilled migrants, and Microsoft’s recent research which revealed that more than 40 per cent of the workforce is planning to look for a new job this year, it’s imperative that organisations work to retain talent.

Angwin is also concerned that organisations skirting around the super increase will negatively impact on the labour market.

“We should be looking at ways to compensate people, not just now but for the future. Surely super and other benefits are a good way to do that. I think that has got more to do with attracting talent right now than it has with financial impact… In all industries, and certainly in the payroll industry, there’s a war for talent, so why would you cut salaries?”

For organisations paying staff on a ‘base plus’ remuneration model (super is paid on top of salary), Mercer’s survey indicated that 62 per cent of these organisations would not offset the increased superannuation contribution by slashing employees’ take-home pay.

Meanwhile, companies paying their employees under enterprise agreements or minimum pay standards will also need to pay the increased super rate on top of an employee’s wage.

The cost of non-compliance

Failure to comply with the super guarantee will cost your company, regardless of whether the shortfall is intentional or a genuine oversight.

“Penalties apply no matter how the underpayments happen,” says Angwin.

If a superannuation shortfall is found, the employer is typically required to pay the original superannuation to the ATO, along with an administration penalty.

“The quarterly administration fee per employee is a set amount: $20. If you have underpaid by $2, it is a significant way to remediate super,” says Angwin.

And then there’s interest calculated as a percentage of the underpayment.

As HRM previously reported in 2018, “On an unpaid superannuation exposure of $1 million, the penalty could be as high as an additional $2 million and the interest could be $500,000. That’s a total exposure of $3.5 million. Directors also face personal liabilities of the unpaid superannuation (i.e. the $1 million),” Prath Balasubramaniam, principal lawyer at Macpherson Kelley, said at the time.

“The kicker is that all these penalties are not deductible,” says Angwin. “We’ve just had a superannuation guarantee amnesty, so you would like to think that anyone who thought they are at risk has dealt with this, but that is not necessarily the case.”

Angwin advises that organisations brush up on the changes and take the following necessary steps to ensure compliance:

  1. Review your company’s employment contracts to determine how your employees’ pay is calculated, and how to recalculate the amount of super.
  2. Engage a qualified payroll consultant to conduct an audit of your organisation’s superannuation setup and calculation for each employee, which should also include a thorough review of processes. Superannuation is currently considered paid once the fund receives it, as opposed to when the organisation pays it.

“We have clients who have gotten into serious trouble by making payments on the 26th of the month, for example, and the money not getting into the super fund until early the next month. Then they find themselves due for penalties because of non-payment,” says Angwin. “It’s not just the set up, it’s the actual process. Just having someone check your pay codes isn’t going to ensure compliance.”

  1. Use the opportunity to make sure your business is compliant across all aspects of payroll, including award interpretation (the minimum legal amount of pay for hours worked), and leave calculations.

Overhauling the $450 minimum threshold

In another bid to boost employees’ retirement savings, the government has also announced the removal of the minimum $450 threshold, so employees who earn less than $450 per month will soon be eligible to receive compulsory super payments at the new rate.

The removal of the threshold, which will likely come into effect from 1 July 2022, is estimated to help around 3 per cent of employees in Australia, mostly young, female, lower-income and part-time workers.

Industries that tend to employ workers who balance multiple jobs or receive income from various sources, such as the arts and entertainment sector, may find the change to be financially burdensome.

Hospitality, retail and aged care could also come under increased pressure.

“If a company employs a lot of casuals or young people who [currently] might not meet the $450 minimum threshold, this change could be a financial shock,” says Angwin. “It’s a fundamental change to how super works in a payroll system.”

Although the financial implications could be significant, Angwin assures the removal of the threshold won’t cause additional administrative pressure for companies who have their payroll system set up correctly.

Lifting the threshold will also require companies to consider who is defined as an employee. Some workers may be independent contractors for employment purposes, but they could be classified as an employee for superannuation.

The ATO provides a number of tests, and there are various technical ways to determine if a worker is an employee, but Angwin says the assumption should always be that they are, unless proven otherwise.

“It’s the duck test. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck… The best approach is to assume that they are an employee unless you can determine that they aren’t.”

Put simply, superannuation will soon be widely available for all.

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