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. 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)[ 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 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.