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Employers to be banned from using salary sacrifice payments to meet SG obligations

November 29th, 2017

The Federal Government has targeted employer misuse of salary-sacrifice contributions to employees’ superannuation accounts as an area for reform.

The Turnbull Government has accepted a recommendation of the Superannuation Guarantee Cross Agency Working Group to close a loophole that enables employers to use money contributed by employees in salary-sacrifice arrangements to meet or reduce their legal Superannuation Guarantee (SG) obligation.

The Bill, which has passed through the House of Representatives and is before the Senate, mandates that an employer’s SG contributions will be set according to an employee’s salary or wages before any salary sacrifice has been applied.

Analysis of tax office data by Industry Super Australia (ISA) in December 2016 estimated that 360,000 employees are affected by the salary-sacrifice loophole, costing them $1 billion in lost employer super payments1.

SG legislation requires employers to contribute 9.5% of an adult employee’s ordinary income into their super account, but the loophole allows employers to calculate the amount they owe their workers based on the salary, less the voluntary sacrifices.

Because the current Superannuation Act makes no distinction between a contribution made from salary sacrificing or an employer contribution, employees who believe they are boosting their retirement income by topping up the compulsory 9.5% paid by employers are inadvertently reducing their SG entitlements.

The identification of the salary-sacrifice loophole was part of a wider report by the ISA which estimated that 2.76 million workers, or almost one-third of Australian workers eligible for super, are missing out on some or all of their entitlement by an average amount of $2,025 per person, or an aggregate $5.6 billion2.

It was this report that led to the Government commissioning the Working Group report into SG non-compliance.

The changes to salary-sacrifice provisions, announced by the Minister for Revenue and Financial Services Kelly O’Dwyer in July, were recommended by the Working Group in its report Superannuation Guarantee Non Compliance3.

The Working Group comprised senior representatives from the Australian Taxation Office (ATO), Treasury, the Department of Employment, the Australian Securities & Investments Commission and the Australian Prudential Regulation Authority.

The Government also accepted the Working Group’s recommendation to give the ATO “near-real time visibility” over SG compliance by employers.

In August, the Government announced the introduction of Single Touch Payroll (STP) reporting. By aligning payroll functions with regular reporting of taxation and superannuation obligations, STP will provide the ATO with more transparent data to more reliably identify and respond to SG non-compliance in “near-real time”.

Employers with 20 or more employees will transition to STP by 1 July 2018. Smaller employers have the later transition deadline of 1 July 2019.

The ATO will also have the power to seek court-ordered penalties in cases of employers found to have “repeatedly” failed to pay their SG liabilities.

Government legislation to strengthen the SG prudential framework includes making directors of superannuation funds who breach their duties to members subject to the same civil and criminal penalties as directors of ordinary managed investment schemes.


1 https://web.archive.org/web/20170220212212/http://www.industrysuperaustralia.com/media/media-releases/average-earners-hurt-by-loophole-that-allows-employers-to-pocket-benefits-of-salary-sacrifice-super/