This article was written by Sarah Yu and Ben Micallef.
There has been an increase in publicity around the underpayment of employees. Employers will soon be able to take advantage of the government's proposed amnesty and correct any failure in the period from 1 July 1992 to 31 March 2018 to fully comply with their Superannuation Guarantee (SG) obligations and avoid fees, penalties and taxes that would otherwise be payable. Following the amnesty, employers who have not complied with their SG obligations in this period will face a penalty of at least 100% of the SG charge.
The SG gap
The SG legislation requires employers to contribute 9.5% of employee's ordinary time earnings into a superannuation fund for each employee, director and certain independent contractors. However, there has been significant non-compliance with these obligations. The ATO has estimated that the SG gap for the 2016-2017 financial year was $2.3 billion.
The consequences
Failing to contribute correct the amount to an employee's superannuation has a range of consequences for employers. They are potentially liable for fees, penalties and taxes, including:
- a SG charge, which comprises the total of the individual SG shortfalls, interest at 10% per annum and the employer's administration component ($20 per employee with a SG shortfall);
- penalties under Part 7 of the Superannuation Guarantee (Administration) Act 1992 (Cth) (which can be up to 200% of the underlying SG charge) (Part 7 Penalties); and
- a general interest charge (GIC) where the SG charge or Part 7 Penalties are not paid by the due date.
These payments are not tax deductible. In addition, there is a reputational risk for the employer, directors and management and the risk that directors of an employer that underpays SG may become personally liable to pay any unpaid SG liabilities.
Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019
In this context, the amnesty that will be offered by the Government is attractive and should be utilised by employers who have not complied with their SG obligations. The Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019 (Bill) was passed by the House of Representatives this week (although it is yet to pass the Senate). The Bill aims to encourage employers to voluntarily self-correct historical non-compliance with their SG obligations.
It achieves this goal by adopting a 'carrot and stick' approach.
- The 'carrot': Employers may qualify for an amnesty and take advantage of reduced fees and penalties and special tax deductions (Amnesty). There is no liability to pay a Part 7 penalty or an administration component in respect of amounts of SG shortfalls that are disclosed under, and qualify for, the Amnesty. In addition, payments of a SG charge, or contributions to offset a SG charge, made during the Amnesty period, may be tax deductible.
- The 'stick': There are increased minimum penalties for employers who fail to come forward during the Amnesty period and disclose historical non-compliance with their SG obligations. From the day after the Amnesty ends, the Commissioner of Taxation (Commissioner) is unable to remit Part 7 Penalties to less than 100% of the SG charge payable in respect of historical quarters covered by the Amnesty. This is significant because, in our experience, the Commissioner would remit the Part 7 Penalties to an employer who self-reported non-compliance with its SG obligations and paid the SG charge. Accordingly, it will be significantly more costly for an employer to address SG non-compliance after the Amnesty period ends.
Employers must satisfy certain eligibility requirements in order to qualify for the Amnesty. Employers must disclose to the Commissioner SG shortfalls for the first time in an approved format. This disclosure must be made during the Amnesty period, which is from 24 May 2018 until 6 months after the day the Bill receives Royal Assent. The Amnesty only applies in respect of SG shortfalls prior to and including the quarter starting on 1 January 2018. The employer must pay the SG shortfall during the Amnesty period. Finally, an employer will be disqualified from the Amnesty if they have failed to pay, or enter into and comply with, an arrangement to pay a SG charge or if they have been informed by the Commissioner that the Commissioner is examining, or intends to examine, the employer's compliance with their SG obligations.
The Bill also makes some consequential amendments to ensure employees are not disadvantaged by employers making contributions under the Amnesty. The Commissioner can, on its own initiative, make a determination to disregard or reallocate an employer's contribution under the Amnesty to ensure an employee does not exceed their annual concessional contributions cap. In addition, contributions under the Amnesty are excluded from the calculation of an employee's 'low tax contributed amounts' and will not attract additional tax under Division 293 of the Income Tax Assessment Act 1997 (Cth).
