Employers need to be aware of the latest practical superannuation changes and how these will impact on current day-to-day business practices. Six top superannuation issues are reviewed.
1. Reduced cap on employer contributions
From 1 July 2009 employers will need to be prepared for the reduced cap on employer contributions to super. The concessional contribution cap is going down from A$50,000 to A$25,000. ‘If you are currently contributing at more than nine per cent for your employees, or you allow salary sacrifice arrangements, or even if you don’t limit contributions to the Superannuation Guarantee (SG) maximum contribution base for high income earners, your employees may be hit with high tax on contributions which exceed the cap,’ said Natalie Gullifer, Partner, Superannuation.
‘The reduced cap was well publicised in the Federal Budget and clients really need to check their systems and check what they’re doing for their different categories of employees,’ continued Ms Gullifer. ‘For some employers, they simply pay nine per cent of their salary to comply with the minimum SG requirements and that’s not likely to be a problem. The problem is more where generous arrangements are in place, where employers contribute more than the nine per cent.’
Many employers allow salary sacrifice arrangements and these are treated as employer contributions. ‘They count for the purposes of this cap and that’s probably the biggest trap in all this,’ said Ms Gullifer. ‘It is such a big reduction. Halving from A$50,000 to $A25,000 is definitely going to have an impact on some categories of employees and employers. Employers need to be aware and communicate with their employees. It’s the employee’s obligation to check what’s going in. It’s not technically a problem for the employer, but the tax affects the employee’s superannuation. Employees could get frustrated with their employers if they feel they weren’t told about this.’
2. What counts as earnings for SG contributions?
The Australian Tax Office (ATO) has finalised its ruling on what counts as Ordinary Time Earnings (OTE) for SG contributions. There are subtle changes from the ATO’s past policy regarding payments in lieu of notice and bonuses which might catch some businesses by surprise.
OTE – a myriad of remuneration categories
OTE is defined as ‘earnings in respect of ordinary hours of work other than earnings consisting of a lump sum payment of any of the following kinds (unused sick leave, annual leave and long service leave) made to the employee on the termination of his or her employment …’.1
There are many remuneration types which fall into OTE. ‘It specifically includes over-award payments, shift loading and commissions,’ said Ms Gullifer. ‘It is also considered to include things like certain bonuses, allowances, payments while on leave, directors’ fees—the list goes on. One of my clients is a financial institution and they had a spreadsheet of about 300 items of remuneration that they paid their employees! The client had taken over different sorts of entities over time—each with their own remuneration structure—so we had to go through each of the descriptions of each remuneration item and work out was it in, or was it outside of, OTE.’
Changes to in lieu of notice
For example, if someone is terminated and they have a right to two weeks notice, instead of having them continue to come to work and work out that period of notice, the employer may pay them the two weeks pay in lieu of notice. That sort of payment used to be considered outside of OTE under the old ATO interpretation as it was in respect of employment generally and not ordinary hours of work, but now it’s considered to be within OTE.
Changes to bonuses
There are many different types of bonuses paid by employers. ‘When it concerns performance during ordinary hours of work, it has always been included in OTE,’ said Ms Gullifer. ‘What is controversial now is that the ATO has not said very much about bonuses and what the required link is (if any) to performance during ordinary hours, and what it has said is quite broad. Even ex gratia bonuses—bonuses given out at the goodness of the employer’s heart—whether or not related to performance, now seem to be within OTE, specifically including Christmas bonuses. This could be expensive for employers from now on if they’re having to pay nine per cent on every ex gratia bonus.’
3. Regular overtime with no award or agreement
Employers could be at risk of having to pay SG on an employee’s entire earnings if their arrangements aren’t governed by an award or agreement which specifies ‘ordinary hours of work’ under the ATO’s revised ruling. The concept of ordinary hours of work is central to what OTE means. Some people do regularly work overtime. ‘The tricky thing is if there is no specification of ordinary hours of work in an award or an agreement or the employee is not covered by an award or agreement,’ said Ms Gullifer. ‘The ATO says in those cases, “The employer has to look at whatever is normal, regular, usual or customary for the employee.” The problem with that is you have to do an employee-by-employee analysis. This will be time consuming for employers because some people might work regular overtime and others might not.’
If it is not possible or practicable to determine what is normal or regular, then the ATO says that the actual hours worked should be taken to be the ordinary hours of work. In that case, employers will have to pay nine per cent on the actual hours worked. ‘In a nutshell, it’s a more certain situation for an employer if they have an award or an agreement which sets out ordinary hours of work,’ continued Ms Gullifer. ‘It could be much more expensive for them if they don’t have an award or an agreement which specifies ordinary hours of work. This may heavily impact some industry sectors, such as manufacturers.’
4. Payroll systems need to capture all reportable employer super contributions
Reportable employer super contributions include salary sacrificed amounts. These will need to be captured from 1 July 2009 so that the total can be included in payment summaries issued to employees for the 2009–10 year. ‘The Federal Government’s intention is that people ought not to avoid obligations or obtain more benefits for themselves by reducing their income through salary sacrificing,’ said Ms Gullifer.
This concept of reportable employer superannuation contributions will be added into income testing for many purposes from 1 July 2009.
‘Employers may face a practical payroll issue about whether their systems currently capture the right data. They have an obligation from the start of the coming financial year to report those reportable employer super contributions to their employees,’ said Ms Gullifer. ‘In other words, this helps employees track what their contributions are. When employees do their tax return, they’re going to have to add in those super contributions for tax purposes.’
5. The impacts on superannuation on ‘excessive’ termination payments
With the impacts of the GFC, the Federal Minister for Superannuation & Corporate Law has cracked down on executives’ termination payments with the release of some draft legislation.
‘It says basically that instead of capping termination payments for executives from seven times annual remuneration, it is now one time’s average annual base pay,’ said Ms Gullifer. ‘There is also a broadly defined concept of a “benefit”, and there are some provisions which seek to prevent the payment of excessive benefits to retiring executives.
‘The implication for superannuation is that it captures superannuation benefits which are more generous than the minimum SG. Accordingly, super benefits, which are paid in connection with the executive’s retirement from their position, could well be caught by this and may need shareholder approval to be paid. However, there’s an exclusion for existing defined benefit superannuation arrangements.’
6. Top-ups to fund defined benefit superannuation arrangements
Pressure to top up funding can be placed on employers that contribute to defined benefit superannuation funds if the value of the fund’s assets has gone down because of the GFC. Defined benefit funds are somewhat ‘old-fashioned’ arrangements, where a benefit is paid as a formula-based benefit, for example a certain multiple of an employee’s final average salary based on years of service, rather than being a bank-like accumulation of nine per cent contributions adjusted for investment earnings.
‘This is a big issue for a number of companies who have defined benefit super funds for long-serving employees,’ said Ms Gullifer. ‘There are lots of complicated funding issues about how an actuary works out what contributions they will have to make and over what period full funding should be restored.
‘The issue has come up because of the GFC and investment markets being so bad in recent periods,’ said Ms Gullifer. ‘Funding levels for many defined benefit funds have gone backwards. Most people have accumulation arrangements, but for defined benefit members, it’s the company that guarantees the payment of the benefits. The sponsoring company wears the investment risk. When actuaries review the funding of these arrangements, sometimes they see that the funding is unsatisfactory and the employer company is recommended to make a significant level of additional contributions to bring the funding back up to a satisfactory level.
‘If an actuary determines that a fund is in an “unsatisfactory financial condition”, this is not as bad as it sounds in the sense that the legislation doesn’t oblige the company to restore funding over any particular time period,’ said Ms Gullifer.
‘The more difficult situation and the more strict situation under legislation is where the fund is considered by the actuary to be “insolvent” and that’s where the employer has to put in the funding to restore the funding position over a five-year period. If the company can’t adhere to that funding plan, then the fund may have to be wound up.
‘It is complicated, but if your fund is in an unsatisfactory financial condition or funding is not as good as it should be, the message is don’t panic. But do get advice so that you understand what your obligations are,’ concluded Ms Gullifer.