Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697635275862.pdf (Australia)
Superannuation Guarantee non-paymentSubmission 43 1.

Introduction Non-payment and underpayment of the superannuation guarantee (SG) are important issues as the incidence of non-compliance is disproportionately experienced by a small cohort of employees, for whom the impact of non-compliance is significant.
ATO analysis demonstrates that, across the economy, non-compliance is believed to be low and voluntary compliance amongst employers is at ‘high levels’, there are specific groups of employers where non-compliance may be between 11-20 per cent.1 This suggests there are two types of non-compliance: 1.

Where an employer deliberately avoid SG payment, and this may be a systemic feature of the sector; and 2.
Where employers are non-compliant, but as a result of other features of the sector, and not as a reflection of deliberate attempts to avoid their SG responsibilities.

Where SG non-compliance is deliberate and systemic, it is important that the regulatory regime is equipped to address underpayment and non-payment.

This submission examines a range of options to achieve this outcome.
The FSC also submits that the current low coverage of contractors and the self-employed from the superannuation system is an ongoing issue for the coverage of the system.

As a threshold issue the Government should continue to consider reforms to effectively extend the coverage of the system to these employment categories.
It may also be the case that these businesses have more volatile cash flow, and as a result non- compliance with the SG regime may be a product of poor cash flow management by small business owners, rather than deliberate attempts by employers to avoid their statutory obligations.

Unfortunately however, the SG regime and the industrial overlay creates complexity for employers that would reduce compliance.

The system also creates a disincentive for employers to ‘make amends’ where they are non-compliant.
This submission therefore also considers a range of practical measures to assist employers who intend to do the right thing in regards to their SG obligations, but may become non-compliant inadvertently, and then be subject to harsh penalties through the tax or industrial system in spite of their good intentions.

The FSC submits that there should be two focuses to promote greater compliance with the SG regime: I. II.
Reconsider the penalty regime for non-compliant employers with a view to encouraging compliance; Implement single-touch payroll to promote ATO data matching that supports enforcement activities; and The FSC also submits that calls for superannuation funds to become actively engaged in enforcing SG compliance (where no actual debt is owing by an employer) should be carefully considered in light of the sole purpose test and, in particular, where a fund is public offer.
1 P 17, Promoting Compliance with Superannuation Guarantee Obligations – ATO, ANAO, 2015 2 Superannuation Guarantee non-paymentSubmission 43 The FSC is concerned that funds that spend members’ retirement savings pursuing the potential underpayment of SG for other consumers, who may not even be members of the same fund or plan, may be difficult to justify under the sole purpose test.
It may also create conflicts of interest where a related party of the trustee is used to pursue instances of perceived SG non-compliance.

2.

The SG charge and ATO compliance activity Employers who wish to be compliant, but pay their SG obligations late and lodge an SG charge statement, are subject to penalties that the ATO has described as punitive and inequitable.2 For large employers, even the administration charge can become onerous and inequitable.
A large employer that underpays the SG for their workforce as a result of an administration error, but then seeks to voluntary rectify the issue when they become aware of the mistake, will necessarily be subject to an ATO administration charge of $20 per employee, per quarter.
Where the employee has a large number of employees the charge can amount to hundreds of thousands of dollar in charges as a result of an inadvertent breach.3 The FSC supports the Committee considering a review of the administration charge in the context of facilitating compliance amongst employers, rather than penalising inadvertent non-compliance.
Nominal interest can be a penalty The FSC is concerned that the penalty nature of the SG charge discourages employers from taking remedial action when a breach occurs.

The SG charge also comprises a “nominal interest” component of 10% pa.

It is intended that the interest charge compensates the member for earnings foregone because their contribution was not made in time.

The application of the charge, however, is different from its objective and acts as a penalty.
Counter-productively the penalty falls hardest on those employers who pay their SG charge early or on time, and the penalty component reduces proportionately the longer the SG charge remains unpaid.

Under the Superannuation Guarantee (Administration) Act 1992 an entitlement to contribution accrues during the quarter, crystallises at the end of that quarter and is to be paid within 28 days.
Contributions are not due until the end of the quarter because it is not until that time that the employee has been paid his or her ordinary time earnings (OTE) upon which the contribution is based.

Whilst it might be argued that many employees’ quarterly ordinary time earnings are predictable, it is not true of those who work flexible hours.
To meet its SG obligations an employer must have made contributions at least equal to 9.5 per cent of the employee’s OTE within 28 days of a quarter ending to fully offset the charge percentage.

However “nominal interest” does not start to accrue from the time that the member’s complying contribution would have been available for earnings (or losses), nor does it commence from the time that the contribution became late.
Nominal interest applies from the day that the quarter started and ends on the date of final payment of the SG charge – a period of approximately five months.
This is clearly a strong penalty 2 P 39, Promoting Compliance with Superannuation Guarantee Obligations – ATO, Australian National Audit Office, 2015 3 ATO website at https://www.ato.gov.au/business/super-for-employers/paying-super-contributions/missed- and-late-payments/our-compliance-approach/ 3 Superannuation Guarantee non-paymentSubmission 43 for an employer who is late, even if only a couple of days, in making an SG payment.
The magnitude of the penalty discourages an employer from remedying their mistake so as to avoid the penalty, and in effect may cause continuing non-compliance.

It would be appropriate for the Committee to review whether the charge is delivering the policy outcome with a view towards redesigning the charge to promote SG compliance.

3.
3.

SuperStream and Single Touch Payroll SuperStream Since the recommendation of the Super System Review in 2009 the superannuation industry has made significant investments in a standardised reporting system for superannuation contributions, called SuperStream.

SuperStream allows for more efficient transfer of contribution information between employers, gateways and superannuation funds.
The core of the system, known as the Super Transaction Network, is governed by an industry self-governance body called the Gateway Network Governance Body.

The FSC is concerned that there is discussion around options to expand the role of the ATO in collecting and distribution superannuation contributions.

The FSC submits that, in the first instance, the efficiency benefits of SuperStream should first be allowed to have an impact before other options are progressed.
Single Touch Payroll Single Touch Payroll (STP) is designed to make employers report to the ATO on their superannuation obligations more frequently and improve the data matching capacity of the ATO.

As a result STP will help the ATO enforce employer compliance in regards to superannuation obligations.

STP is expected to be fully implemented for medium and large employers from July 2018.

There is currently no public timeframe for the extension of STP to smaller employers.
Under STP employers will have to report wages, PAYG income tax, withholding tax and SG contribution information at the same time that they make these payments.

This is a significant improvement from the current lag in reporting timeframes, and inconsistent reporting arrangements across payment types.

Where SG non-compliance is currently occurring, this is more likely to go undetected for an extended period of time.
STP, however, will likely significantly condense the timeframe within which the ATO may become aware of non-compliance.

In conjunction with the proposed remedies to charges and penalties detailed in this submission, STP creates the opportunity for the ATO to promote compliance through softer methods that have minimal negative impact on employers or employees.
For example, the ATO may become aware of SG non-compliance within days of the contribution not being made and have the capacity to automatically generate a letter to the employer identifying this issue and providing them a timeframe to make amends.
The FSC submits that the Committee should consider the merits of allowing the ATO to have the discretion to provide a ‘penalty free’ period after which an employer is notified of their non- 4 Superannuation Guarantee non-paymentSubmission 43 compliance to allow for remedial action and support compliance without excessive penalties for a minor breach.
The FSC also submits that the Government should consider linking unpaid super to remittance of tax and that it is built into any tax liability when a company or sole trade lodges their tax return.

The order of priority could be established so that unpaid superannuation is ranked first and tax obligation second.

The benefit of this approach is that the responsibility is on the ATO to follow up unpaid contributions, and removes the distinctive on the employer to take remedial actions.

4.
4.

Role of a superannuation fund in relation to SG compliance The FSC has a threshold concern in relation to the legitimate role of a superannuation fund in undertaking and investigating potential SG compliance and enforcement activities.

Paraphrasing, section 62 of the SIS Act has the effect that a superannuation trustee should ensure that the sole purpose of the fund is to provide retirement benefits for members of the fund.
There may be a basis to argue that where SG non-compliance is evidently systemic across a fund’s employer-base then the fund can legitimately take action in relation to perceived non-compliance.

Further, circumstances may arise where a trustee is under a contractual duty to recover amounts owing to it by employers.

Under both of these circumstances it may be consistent with the sole purpose test for a trustee to undertake enforcement activities.
Most arrangements, however, are not structured in this manner.

Rather, the employer commonly is under no contractual obligation to make payments of amounts to the trustee in respect of SG-style contributions for its employees.

Rather, the trustee agrees to accept as employer contributions such amounts that an employer chooses to make in respect of such employees nominated to the trustee from time to time.
Most major superannuation funds are also public offer funds and it would be very unlikely systemic non-compliance is occurring across a public offer fund’s membership.

Were a public offer fund trustee to take robust action in relation to perceived non-compliance with the SG the fund is effectively using the retirement savings of one class of member to pursue potential shortfalls in contributions for another class of members, or even on behalf of employees who are not members of that fund.
This creates a clear tension with the sole purpose test.

The FSC submits that it would be appropriate for the Committee to consider the compatibility of superannuation fund action in this area with the legislative responsibilities.

The FSC is also concerned that there may be conflicts of interest arising between funds and related parties that are exacerbated by poor governance practices.
A superannuation fund may choose to enter into a related party service contract, whereby an organisation is paid by the fund to take enforcement action over SG non-compliance.

This may give rise to conflicts of interest if the same service provider is also represented on the board of the superannuation fund and effectively has oversight over the decision to establish the commercial arrangement in the first place.
This has the capacity to create poor outcomes for consumers if not subject to strong governance arrangements.

Higher standards of governance are necessary in the superannuation system to 5 Superannuation Guarantee non-paymentSubmission 43 ensure that trustees are acting in accordance with the sole purpose test, and to prevent conflicts of interest in creating commercial arrangements with related parties.
For this reason the FSC has continued to support a legislative requirement for all superannuation funds to appoint independent directors and an independent chair.

6 Superannuation Guarantee non-paymentSubmission 43