Have you adjusted your payroll to avoid a Superannuation Guarantee Charge (SGC)?
10 March 2020
With all the recent focus on the introduction of theSuperannuation Guarantee Amnestythere are a couple of important superannuation changes that might have escaped your attention.
These changes will require some employers to reconsider if they need to top up the Super they are paying now to avoid a Superannuation Guarantee Charge for the March 2020 Quarter.
Salary packaged superannuation
Prior to 1 January, any salary sacrificed amount contributed towards Super was treated as an employer contribution and wasn’t included in the earnings base. Effective 1 January 2020, superannuation contributions that are wholly or partly funded through a salary sacrifice arrangement need to be included in the earnings base against which each employer measures whether they have contributed at the legislated Superannuation Guarantee rate, which is currently 9.5%.
When calculating the earnings base upon which an employer must pay superannuation contributions, up until 31 December 2019, an employer could use the gross salary paid – the amount on which Pay As You Go Withholdings were deducted – as the relevant base. But from 1 January 2020, an employer will need to include the sacrificed super contribution in the earnings base as well and ensure they provide 9.5% on the increased amount to avoid being in a Superannuation Guarantee shortfall position.
If an employer were to continue using the old system and use gross salary to work out their super contribution, they will always be short on their minimum employer super contribution, which is equal to 9.5% of the salary sacrificed towards superannuation. That means they will have locked in a Superannuation Guarantee Shortfall each and every quarter until they change their approach. And while the Shortfall might not be a large amount, the loss of a tax deduction and the additional Superannuation Guarantee charges could quickly turn the mistake into an expensive exercise.
Roz has a total package of $100,000. She has agreed to sacrifice $8,650 each year towards superannuation and her employer has always ensured that amount has been contributed to her nominated complying fund. The balance of $1,350 was allocated towards some other benefits. This means Roz has a gross salary of $90,000 and this is the amount that has been subject to PAYG Withholding. Prior to 1 January 2020, Roz’s employer contributed at slightly above the required 9.5% rate (9.6% x $90,000 = $8,650) so they didn’t have a shortfall and Roz had agreed for this to occur. However, from 1 January 2020, Roz’s employer will need to contribute $9,371 to her superannuation fund ((9.5% x ($90,000 + $8,650) = $9,371)) to avoid being in a Superannuation Guarantee shortfall position. Hence, Roz’s employer will need to increase the contribution they make for her by $721 (on an annualised basis) in order to remain Superannuation Guarantee compliant.
Employers have until 28 April 2020, the due date of the first quarterly contributions required since 1 January 2020, to capture the change and make any top-up payment. To avoid a Superannuation Guarantee Charge liability, employers should:
Review their salary sacrifice arrangements and ensure they are using the appropriate earnings base as from 1 January 2020.
In the example above, Roz’s employer will also need to decide whether to restructure Roz’s salary sacrifice agreement to put a cap on costs going forward, or whether the additional Super contribution will be funded by them going forward.
Ordinary Time Earnings
Ordinary Time Earnings (OTE) is simply the reward paid to someone for working their ordinary hours of work. This differs to Overtime, which is paid for working outside of ordinary hours of work. Traditionally, an ordinary hour of work is defined by the normal span of hours a person is required to work; so, a working day starting at 8.30am and ending at 5.00pm, with relevant breaks, would normally be regarded as seven and a half ordinary hours of work. This span of hours can be changed to accommodate the needs of an employer or an industry, but the key point is that OTE is based on the ordinary hours of work by each employee, however that is defined.
From 1 March 2020, the Fair Work Commission has commenced imposing new rules as part of changes to annualised salaries provisions in 19 industry awards. These changes, amongst other rule changes, will require employees to be advised in writing of the ‘outer limit’ of how many ordinary and overtime hours can be worked without requiring a payment higher than their annualised wage. This change has come about from groups of employees habitually working lengthy working weeks, frequently involving weekends, who were remunerated with an annualised salary or wage based on the same standard as everyone else, thereby not recognising the extra hours each person individually worked. However, if their salary or wage was reverse engineered based upon the hours they were habitually working, and they were paid their relevant award rates for that work, they would have been entitled to Overtime and a higher salary or wage than they received.
The flow on effect for superannuation purposes is these extra habitual hours that staff are working could be regarded as Ordinary Times Earnings, such that superannuation coverage may be falling short of what is currently required. Furthermore, following the 1 March change, it may be easier for these extra hours to be seen as normal or ordinary hours of work if there is an on-going work pattern, such that Super should have been paid on each hour of work and not just the first 37.5 hours.
Simplistically, let’s say an employee’s contract stated they would be expected to work 37.5 hours each week between the hours of 8am and 6pm and their rate of pay meant no award was applicable. However, the reality was they were frequently working nine hours each weekday and seven and a half hours on a Saturday or a Sunday, making a “normal” working week of 52.5 hours. This would mean the employee was commonly working in excess of 40% of their ordinary hours each week, but their actual hourly rate of pay under the relevant award would now need to take account of their extended habitual hours of work. It is this kind of arrangement that this change in award rules is intended to address.
After considering this employee’s (now) ordinary hours of work of 52.5 hours, from a Superannuation Guarantee perspective, if Super isn’t adequately provided for, then the shortfall could already be significant. This is because the earnings base applied was based upon the standard 37.5 hour week, as was stated in the employee’s original work contract or agreement. However, due to the changes that have occurred in their work patterns and been impliedly agreed to, their total hours worked each week is likely to have become their OTE, meaning their total salary or wage will approximate their OTE and not just 37.5 hours out of a total of 52.5 hours.
Moving forward from 1 March 2020, ordinary hours will need to be specifically identified by employers as awards are modernised and rules incorporated into those industrial agreements, meaning the concept of ordinary hours may become more fluid. The Superannuation Guarantee issue will be where this is identified after a critical super payment date has passed and a Superannuation Guarantee Charge is identified.
We recommend that employers immediately confirm whether any of their employees, particularly those undertaking administrative, secretarial and junior management roles, are likely to now be covered by an award. If so, they should review the changes to the annualised salary provisions and their current remuneration processes to ensure they are compliant as from 1 March 2020. Amongst other changes, this may involve:
Advising award-covered employees of the maximum hours they can work under their employment agreement before they become entitled to overtime or penalty rates.
Actively monitoring and managing working hours of these employees, for example, by imposing restrictions on periods they are expected to review emails or take phone calls outside of normal working hours.
Require these employees to record their working hours, including their start, finish and break times during each day.
Calculate the correct superannuation earnings base to be used and ensure sufficient Super is paid so as to reduce any Superannuation Guarantee Charge liability to a nil amount. This will need to occur on a regular basis as circumstances change.
If you require any assistance or advice with your organisation’s superannuation responsibilities, contact the Tax Advisory team today.