Revisions to ensure prompt payment for workers and appropriate penalties for employers have been a long time coming.
Why payday super offers a timely chance to close the gap
It may be more than two years away, but there is much to think about when it comes to the design, implementation and impact of payday super (PDS). The government’s new policy will require employers from 1 July 2026 to pay their employees’ superannuation guarantee contributions at the same time as their salary and wages. PDS will replace the quarterly payment requirement under the current SG regime which has been in place since 1 July 1992. It will be a game changer when it comes to employers’ obligations, cash flow, systems and processes across a wide range of stakeholders.
One of the primary benefits of PDS for employees is the earlier payment of their SG contributions into their superannuation account. This will generate earnings on those contributions earlier and their retirement savings will benefit from the compounding effect of this over time.
The legal framework
Constitutionally, the Commonwealth cannot require employers to pay employees’ superannuation, but it can impose a penalty on an entity for failing to pay a tax or lodge a statement with the ATO. This is why the current obligation on employers under the Superannuation Guarantee (Administration) Act 1992 is not framed as a positive obligation to pay superannuation each quarter. Rather, employers are required to pay a tax — the SG charge (SGC) — where they have an SG shortfall for a quarter for an employee. In calculating the SG shortfall, the charge percentage is reduced by the payment of contributions for eligible employees to a complying fund by the prescribed date (ie: where the employer has provided a minimum level of superannuation support for their employees).
The new PDS policy was announced jointly by the Treasurer and Assistant Treasurer on 2 May last year as part of the budget measures announced on 9 May. The policy sits against the historical landscape of decades of community and government debate, reviews and reports, and continual legislative and regulatory amendments relating to the superannuation system.
At its heart are two objectives:
- Determine the best way to fund the retirement of millions of Australians through the superannuation system.
- Ensure that appropriate safeguards and consequences are in place to encourage employers to meet their obligations, face just (as in “fair”) penalties when they do not, and protect employees’ entitlements.
Why is the law changing?
The perennial problem of underpayment or failure to pay employees’ superannuation affects the financial future of millions of workers and underpins the government’s decision to mandate real-time payment of employees’ superannuation from 1 July 2026.
According to the ATO’s tax gap figures for 2020–21, the net SG gap is 5.1 per cent. While this may be interpreted positively – that nearly 95 per cent of employers are complying with their SG obligations – it also means that $3.619 billion of superannuation entitlements were not paid in that period (being the difference between the estimated theoretical SG liability and what was paid). The ATO’s gap analysis shows that the net gap was more than $3 billion in five out of the six years from 2015–16 to 2020–21. The ATO’s super guarantee compliance snapshot 2022–23 also sets out the SG gap, debt levels and ATO compliance action.
According to the ATO, more than 60 per cent of employers pay their employees’ superannuation quarterly, and nearly 40 per cent pay more regularly. Shifting from a quarterly payment requirement to real-time payment based on pay events (which may be as frequent as weekly) is an immense system change and necessitates a massive shift in the rules, mindset and behaviour. Good law design and administration, widespread education and timely system upgrades will be essential to implement PDS successfully.
Considerations during targeted consultation
Targeted consultation coordinated by Treasury and the ATO commenced in June 2023 in the form of a series of facilitated workshops and meetings with key stakeholders. Pleasingly, the law is being concurrently co-designed with the administration of the new regime. This means that the practical impact of the new rules and how they will be administered is being considered as part of the law design phase. Consultation seeks to minimise the likelihood of unintended outcomes or administrative shortcomings that could be very difficult to resolve post-enactment of the enabling legislation.
During the targeted consultations, stakeholder feedback was sought to understand current processes and identify those aspects of the superannuation system that need to be reshaped to enable PDS. Participating stakeholders include the Tax Institute and other professional associations, industry bodies, small business and employer groups, superannuation funds, clearing houses, payroll service providers, digital service providers (DSPs) and other intermediaries.
Some of the considerations that come to mind as PDS is co-designed include:
- Early verification of data as new employees are onboarded — identifying the “source of truth” of the data of the relevant employer, employee and superannuation fund.
- Timing rules around pay events in STP versus when the employees’ superannuation account is required to receive the contribution to avoid an SG shortfall.
- Redesign of the SGC — namely, the earnings base on which the charge is imposed, the nominal interest component and the administration component.
- Part 7 penalty — currently equal to double the SGC — for failing to lodge an SG statement with the Commissioner when an SG shortfall arises.
- Lack of discretion for the Commissioner to remit in part or full any amount of the SGC.
- Salary and wages paid in advance.
- Adjustments, corrections for under and over-payments, and reconciliations.
- SG contributions versus other employer contributions, such as salary sacrifice contributions (noting there are limitations on the minister’s powers over salary sacrifice contributions).
- Processing periods associated with electronic payments and clearing houses.
- Interaction with SuperStream and MATS requirements.
- Interaction with contribution cap rules and income tax deductibility provisions.
- Operation of the maximum contribution base mechanism.
- Operation of the employer shortfall exemption certificate.
- Using myGovID, myGov and other ATO systems/platforms.
- Defined benefit funds.
- Stapled superannuation.
- Choice of fund rules.
- Exceptions and rejected payments.
The government released a consultation paper on 9 October 2023 seeking feedback from stakeholders. As set out in the joint submission on the consultation paper lodged with the Treasury by the Tax Institute and other professional associations, the joint bodies support PDS and recognise this as a rare opportunity to address a range of actual and perceived shortcomings and deficiencies in the current system.
The joint bodies are of the view that:
- PDS should be implemented in a manner that reduces compliance costs, uses existing reporting mechanisms and avoids the duplication of efforts.
- The SGC must be updated so it is simpler, more accurately compensates employees’ superannuation accounts for the loss in earnings for the duration their SG contributions are unpaid, and re-designs the penalty component.
- PDS should impose penalties on employers for non-compliance on a proportionate basis so those employers who make an honest mistake are treated less harshly than those who engage in egregious non-payment of their SG obligations.
- PDS should incentivise employers to come forward and report SG shortfalls.
- An appropriate transitional mechanism should allow employers, SMSFs and DSPs the time needed to adapt to the new requirements, including an amnesty to encourage employers to rectify historical SG shortfall amounts; and
- technology should be utilised to ensure that the ATO’s systems and software providers enable a successful implementation of PDS.
The liquidity and cash flow challenges arising from more frequent SG payments will more acutely impact small businesses that are already dealing with labour shortages, increased interest rates, and greater supply costs (such as fuel).
Feedback on the consultation paper should inform further announcements anticipated as part of the federal budget 2024–25 on 14 May 2024. Exposure draft legislation is expected to be released during 2024, which will bring about the final design of the law in the form of an enabling bill introduced into Parliament in 2024 or 2025, ahead of the announced start date of 1 July 2026.
Enshrining PDS into law well before the commencement date is crucial so digital service providers have the certainty to proceed with designing and rolling out the necessary changes to payroll software and systems in time for when the new rules take effect. A key feature in designing software to enable PDS will be to leverage existing natural business systems.
The SGC regime was designed and enacted in a completely different era. Its archaic legacy design is no longer fit for the present or the future. There is much to be done between now and July 2026 to successfully implement PDS. It would be idealistic to suggest that it is the panacea for all the problems, shortcomings and failings of the current superannuation system.
After more than 30 years, this is a golden, and long-overdue opportunity to reform the SG regime to ensure employees receive their superannuation entitlements and employers who fail to meet their obligations face fair and proportionate penalties that align with their degree of culpability. More importantly, this policy advances the overarching objective of securing Australians’ superannuation entitlements.
Robyn Jacobson is the senior advocate at the Tax Institute.