The Australian, July 14, 2017
Employers will be forced to pay workers’ full superannuation entitlements following a federal government crackdown on a legal loophole today, after The Australian obtained a confidential interagency report into an estimated $6 billion worth of annual unpaid super.
Financial Services Minister Kelly O’Dwyer will introduce legislation amending rules that allow companies to reduce the amount in superannuation contributions they pay workers if an employee sacrifices part of their salary into their nest egg.
Although the extent of super guarantee minimisation by businesses has not been quantified, the change will close a loophole many businesses use to shore up cash flow during financial stress.
The Australian can also reveal that the Australian Taxation Office, the financial regulators and the Fair Work Ombudsman have pledged to ramp up their monitoring of super payments.
Previous analysis by Industry Super Australia has estimated 360,000 employees are affected by the salary-sacrifice loophole, costing them $1 billion in lost employer super payments.
An interagency working group was set up by Ms O’Dwyer in December after former Treasury director Phil Gallagher prompted a Senate inquiry with his estimate that a third of workers were losing out on about $5.6bn in super entitlements a year.
The amendment will be the first of several legislative changes Ms O’Dwyer plans this year to target compliance in making superannuation payments, and stems from a recommendation in the previously confidential report on superannuation guarantee noncompliance.
The cross-agency report — which involved Treasury, the ATO, the Department of Employment and financial regulators the Australian Securities & Investments Commission and the Australian Prudential Regulation Authority — was handed to Ms O’Dwyer in March but had not been publicly released.
Following a Freedom of Information request by The Australian, the government has pledged to act “immediately” on a recommendation contained in the report that will prevent businesses reducing the super entitlements they contribute for workers who choose to make voluntary contributions to their accounts through salary sacrifice.
Super guarantee rules require businesses to pay workers 9.5 per cent of their ordinary-time earnings into their savings, but the existing law, which was drafted in the early 1990s, allows employers to calculate the amount they owe their workers based on the salary less the voluntary sacrifices that have been made, meaning employees may be short-changing themselves by contributing to their retirement savings.
A worker who sacrifices 9.5 per cent of their $100,000 salary would reduce the salary on which their employer would calculate the super guarantee to $90,500. This in turn would reduce the minimum required super guarantee contribution from $9500 to $8598.
Under the Superannuation Act, there is no current distinction between a contribution from salary sacrificing or an employer contribution, meaning companies can either count the salary sacrifice as part of their own obligation or calculate the 9.5 per cent from a lower, post-sacrifice salary level.
“The existing superannuation law means employees who make voluntary contributions through salary-sacrifice arrangements inadvertently reduce their entitlements to the superannuation guarantee,” the cross-agency report says. “There is no clear rationale for this situation.
“Amendments to prevent this anomalous outcome would improve confidence in the system.”
ISA has estimated that workers who suffer unpaid super miss out on about $2000 each year on average.
This short-changes these employees by about $24,000 in investment returns by retirement and leads to an extra $100 million annually added to the government’s Age Pension bill, the single biggest cost to the annual budget.
ATO Deputy Commissioner James O’Halloran said the estimate by Mr Gallagher, who is now a special adviser for ISA, was “likely to substantially overstate the actual size of the superannuation guarantee gap” because of the incomplete data collected by the ATO.
However, the cross-agency working group has not yet been able to provide its own estimate of the extent of unpaid superannuation as the ATO lacked the ability to measure the extent of payment and non-payment.
“Administrative data collected by the ATO does not allow accurate calculation either of people’s superannuation guarantee entitlements or the amounts they actually receive,” the report said.
“The ATO is seeking to complete a credible, reliable estimate of the superannuation gap, but at this stage it is not completed.”
The ATO data does show that trade workers, machinery operators, labourers, consultants (including contractors) and apprentices are more likely to be underpaid. Younger workers and those with incomes less than $37,000 are also more likely to be underpaid, along with employees from less affluent areas.
The ATO previously has estimated that between 2 per cent and 11 per cent of businesses failed to pay the proper level of super. The Small Business and Family Enterprise Ombudsman has found that a fifth of small businesses dip into workers’ superannuation and wages if they are experiencing cashflow problems.
Among nine recommendations made by the cross-agency report, all under “careful consideration” by the government, is a proposal to extend the new Single Touch Payroll system to all businesses “as soon as practicable”. Single Touch Payroll, which aligns payroll functions with more regular reporting of tax and super, will apply to businesses with more than 20 employees from mid-2018. The report said including smaller companies in this deadline was feasible.
Several recommendations made by the agencies do not require change to the law, and the ATO has said it would “rebalance” the focus of its super compliance program to focus on casework.
The ATO, APRA, ASIC and the Fair Work Ombudsman have also agreed to meet each quarter to exchange information on superannuation compliance and increase monitoring of non-compliance.
The agencies said it was “difficult to quantify” the extent of businesses exploiting the salary- sacrifice loophole, but it did not have evidence it was widespread.