Effective 1 July 2021, employers will be required to increase the minimum superannuation contribution to employees from 9.5 percent of “Ordinary Time Earnings” (OTE) to 10 percent.[1]
Depending on whether an employee’s salary is expressed as inclusive or exclusive of superannuation, it may result in decrease in an employee’s take home pay, or increased costs for the employer. Consequently, employers should carefully consider the entitlements owed to workers and whether adjustments must be made.
It is important to get superannuation right because there is no statute of limitations on superannuation. Furthermore, if an employer underpays superannuation, it is not a simple matter of making an additional payment to the employee’s super account. The employer is required to pay the money to the ATO together with an administration penalty (75 percent of the liability)[2] and a penalty under Part 7 of the Superannuation Guarantee (Administration) Act 1992 (Cth), which is up to 200 percent of the underpaid superannuation. Similar to other areas of regulation, self-reporting may reduce the penalty imposed.
The laws governing superannuation can be quite technical. This article sets out some key considerations for employers reviewing their organisation’s superannuation arrangements.
Is remuneration inclusive or exclusive of superannuation?
Superannuation is often framed as an add-on to wages. This is why we say “the pay for this job is $60,000 plus 9.5 percent super”. Every time we use the phrase “plus super”, we are saying that remuneration is exclusive of superannuation.
The benefit of structuring pay as exclusive of superannuation is that it makes it easy to compare the pay rates against Award and Enterprise Agreement rates, because wage rates in Modern Awards and Enterprise Agreements are exclusive of superannuation.
Executives and professionals (including lawyers in law firms) typically have their wages expressed inclusive of superannuation: (e.g. “The salary is $60,000 inclusive of super” or “$54,794 plus 9.5 percent superannuation”). For this group of employees, their take-home pay will reduce on 1 July 2021.
It is not safe to assume that your organisation’s overall wage costs will consistently increase on 1 July 2021 when minimum superannuation contribution rate increases, especially if your organisation’s offer letters and employment contracts have evolved over time. Now is a good time to review your employment documents to assess whether employees have their remuneration expressed as inclusive or exclusive of superannuation.
More super than the legal minimum
Some employees receive more than the legal minimum superannuation contribution, either because they salary sacrifice superannuation or their employment contracts say that they are entitled to more superannuation than the legal minimum (which will be 10 percent on 1 July 2021).
The 0.5 percent increase in the minimum superannuation contribution does not automatically mean that all superannuation contributions in your organisation must increase by 0.5 percent.
It is a good time to revisit your salary sacrifice and employment documentation to consider what the impact is, if any, of the increase in superannuation contributions.
Super for Contractors
The superannuation legislation deems certain contractors (non-employee workers) to be employees eligible to receive superannuation contributions. The ATO interprets these deeming provisions to mean that your organisation (as the “Principal” in that contractor relationship) needs to make superannuation contributions if the contractor meets all of these criteria:
- the contractor is engaged directly, not through a company, trust or partnership, for whom more than half of the value of that contract is for the contractor’s labour;
- the contractor is paid for their personal labour and skills, not by reference to achieving a result (e.g. contractor is paid an hourly rate); and
- the contractor performs the work personally.
Typically, contractor agreements may push the responsibility for making superannuation contributions to the contractor-worker. However, this does not exonerate the Principal from the statutory obligation to make superannuation contributions.
Now is a good time to consider whether your organisation has any potential liability for superannuation for any of its contractors, and whether any underpayments or other past practices need to be rectified.
Common items for super
Superannuation is paid on “Ordinary Time Earnings”. This is a list of common payment types which the ATO has referred to in its key superannuation ruling SGR 2009/2:
| Payment type | Super payable? |
| Overtime pay | No superannuation is payable for this, because by definition, it is overtime. Some employers regularly roster employees to work overtime (i.e. rostered overtime). The starting point is that this is not “Ordinary Time Earnings” for which an employer needs to pay superannuation, even if it is customarily (or ordinarily) how the employees’ work is scheduled. |
| Leave payments | Annual leave, long service leave personal leave payments (i.e. excluding any leave loading) are “Ordinary Time Earnings”. The Superannuation Guarantee (Administration) Regulations 2018 (Cth) exclude certain types of leave payments from superannuation contributions, such as paid parental leave and top-up payments for employees undertaking jury service or voluntary emergency management activities (e.g. CFA volunteering) and defence force service. |
| Annual leave loading | Annual leave loading is subject to superannuation unless the employer can demonstrate that the annual leave loading is paid to compensate the employee for the loss of opportunity to work overtime. In our experience, very few employers explicitly state this in their policies, offer letters or employment contracts. For more on this, please see a previous Moores update here. |
| Allowances | Allowances that are paid as reimbursements (e.g. a car allowance that is paid by the kilometre) is not subject to superannuation. Superannuation is payable on a tool allowance or first aid allowance. |
The Court says that is is meant to be simple?
From time to time, it can be difficult to determine whether a particular payment is subject to superannuation. When that happens, it can be helpful to consider the intent of the legislation. Helpfully, the Full Court in Bluescope Steel v AWU said that superannuation legislation aims to provide a simple and efficient way of securing a minimum level of superannuation for workers based on “self-assessment by employers and administration by employers and the Australian Tax Office”.[3]
The upshot is, we need to apply a different lens to superannuation to how we normally look at employment entitlements. Superannuation legislation is not beneficial legislation (beneficial legislation like the Long Service Leave Act is interpreted so that the benefit of the doubt goes automatically in favour of the employee). Superannuation legislation needs to be interpreted with this question in mind: what makes sense given that the system is meant to be simple and easy to administer?
When difficult questions arise in relation to superannuation, it might even be appropriate to approach the ATO for an administratively binding advice.
With the increase to the minimum superannuation contribution, it is worth looking at whether your superannuation arrangements comply with prevailing standards. It pays to be proactive in this space, particularly as there is no statute of limitations.
Next steps
In light of these changes, we recommend that employers consider:
- Reviewing worker entitlements to determine if wages are inclusive or exclusive of super;
- If workers are currently paid 9.5 percent super, employers will need to increase this to 10 percent;
- Having discussions with employees – particularly if the changes are likely to impact their take home pay;
- Whether there are any historical superannuation practices that need to be rectified;
- Whether it should ask employees to sign new contracts with more modern terms (particularly if employers wish to absorb the increase without a reduction in the take home pay of workers).
How we can help
For more information on what this might mean for your organisation or how to apply it practically, please do not hesitate to contact us.
Note: This article contains general information only. It is not legal advice and should not be relied upon as such. You should always obtain legal advice based on your needs and circumstances before taking action on the matters referred to in this article.
[1] From time to time, we hear news that the Coalition Government is considering delaying this superannuation contribution increase. At this time, the Coalition Government has not put forward any legislation to change the scheduled increase.
[2] Pursuant to Section 284-75(3) of Schedule 1 of the Taxation Administration Act 1953. This penalty is known as a TAA default assessment administrative penalty.
[3] Bluescope Steel (AIS) Pty Ltd v Australian Workers’ Union [2019] FCAFC 84 (24 May 2019), [43] Alsop CJ