Super cost time-bomb awaits unprepared SMEs

Mark 1 July 2008 in your diary in big bold letters…NOW. Because, from that date, your cost of paying the 9% compulsory superannuation under the super guarantee regime could increase. By TERRY HAYES

Mark 1 July 2008 in your diary in big bold letters…NOW. Because, from that date, the cost of paying the 9% compulsory superannuation under the super guarantee regime for employees could increase. No, the 9% rate is not rising, but rather the basis on which it is paid is about to change.

Currently, an employer must pay 9% of salary and wages in compulsory superannuation for employees. That is, 9% of “ordinary time earnings” (OTE).

This term is specifically defined in the superannuation legislation, the Superannuation Guarantee (Administration) Act 1992. However, some awards may contain their own definitions of OTE that may differ from the definition in the superannuation law. And that’s where 1 July becomes important.

After that date, ordinary time earnings as defined in the Superannuation Guarantee (Administration) Act 1992 must be used to calculate super contributions for employees. And this may vary from the award. If it does, the amount employers have to pay will change.

The Tax Office has urged employers to make sure they have the correct systems in place, to handle this change in requirements and to plan for any additional costs.

Let’s look at this a little more closely.

Ordinary time earnings

Ordinary time earnings is generally defined as what an employee earns for ordinary hours of work including over-award payments, shift loading or commissions.

It excludes such things as overtime and there are some other exceptions that employers should be aware of. For example, payments specifically excluded from salary or wages such as reimbursement of expenses, benefits subject to FBT, workers’ compensation payments, and payments for domestic or private work under 30 hours per week.

Most employees have OTE as their earnings base, but some have other earnings bases that may be contained in:

• an industrial award;
• an existing agreement they have with their employer;
• a fund’s trust deed; or
• a Commonwealth, State or Territory law.

Click to next page for an employer checklist.

Earnings base standardised to OTE

Currently, an employer who was contributing to a superannuation fund for the benefit of an employee or employees in accordance with an earnings base established before 21 August 1991 can continue to use that notional earnings base until 30 June 2008.

This means an employee may currently be paid lower super contributions (as a proportion of total remuneration) when compared with another employee in similar circumstances.

However, from 1 July 2008, the earnings base is standardised to OTE for all employees under the Superannuation Guarantee (Administration) Act 1992. As a result, all employers are required to use a notional earnings base which is at least equivalent to OTE.

If the current super guarantee amount paid by an employer is less than the minimum 9%, the Tax Office says employers should increase this amount to meet the minimum to avoid paying the super guarantee charge (SGC) penalty.

Employer checklist

The Tax Office suggests that the following checklist may help employers prepare for the 1 July 2008 changes:

• review the earnings base for all employees to ensure their super contributions are being calculated based on ordinary time earnings;
• review the checklist on the Tax Office website (see below) to identify what is included and excluded from ordinary time earnings. This checklist should also be used to update any software or payroll systems as the Tax Office will not be issuing electronic media specifications for ordinary time earnings;
• if an SME pays employees bonuses, the bonuses should be included when calculating the 9% super guarantee (but some exceptions apply eg Christmas bonuses);
• if an SME pays employees allowances, the allowances should be included when calculating the super guarantee (although there are exceptions for reimbursements or fully expended allowances);
• if paying employees commissions, the commissions should be included when calculating the super guarantee;
• allow for the cost impact on the business if required to increase super contributions for employees – there is time for this to be done, so it’s important to work out now if this will be necessary;
• ensure systems are in place and updated to handle a change in super contributions; and
• devise and implement a strategy to inform employees of possible changes to their super contributions.

Some useful information on OTE and the super guarantee is available in the Tax Office publication Using ordinary time earnings to calculate the super guarantee. It is equally important for SMEs to contact their accountant or adviser to make sure they correctly cover their compulsory super payments after 1 July 2008. Alternatively, SMEs can contact Tax Office itself on 13 10 20.

Default fund insurance requirements

Another thing for SMEs to keep in mind is that, from 1 July 2008, all employer nominated super funds (also known as default funds) must offer minimum levels of life insurance death cover to members.

However, the Tax Office notes that there are some instances where default funds do not need to meet the life insurance requirements (eg for Retirement Savings Accounts and contributions being made under a Federal award).

Take action now

Getting super right is critical for SMEs and the 1 July 2008 changes are likely to catch many unaware. Look at this issue NOW. If it doesn’t affect you – fine. Just don’t leave it too late to take action.