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Superannuation guarantee gap a bitter blow for low-income workers

When employers don’t meet their superannuation obligations it is the employees who are left short-changed.

Employers who don’t pay the correct super entitlements to their employees may now face court-ordered penalties which could include up to 12 months' imprisonment. 

Following a number of reports examining the operation, administration and extent of non-compliance by employers, the government is seeking to legislate on a number of key recommendations arising from the Superannuation Guarantee Cross Agency Working Group that was presented on 31 March 2017.

Introduced in 1992, Australia’s compulsory superannuation guarantee system requires employers to pay a 9.5% superannuation contribution on behalf of all employees who are over the age of 18 and earning more than $450 a month. 

Deakin Business School’s senior lecturer in financial planning and superannuation, Marc Olynyk, says that while the superannuation guarantee is a fundamental pillar of Australia’s retirement income framework not all employers are fulfilling their financial obligations.

‘Australia’s superannuation guarantee system has been designed to assist workers generate an income in retirement and to take pressure off the government age pension.  However, it has become evident over the past few years that a significant superannuation gap exists with a number of employers not meeting their super guarantee obligations either as a result of not paying enough or not paying it at all. The Australian Taxation Office (ATO) recently announced that for the 2014-15 year, the amount of the superannuation guarantee gap is estimated to be around $2.85 billion a year, representing a 5.2% shortfall in what employers should be paying,’ he says.

Many of the hardest hit employees, he explains, are the low income earners in industries that include accommodation and food services, construction, manufacturing and retail.

‘This has significant implications on the ability of these workers to save an adequate income in retirement and as a consequence needing to have an ongoing reliance on the social security system and the government and tax payers who fund it.’

Because superannuation contributions are based on earnings, low-income earners typically accumulate relatively low superannuation balances in retirement and this makes it even more critical that their full entitlements are paid.

‘Based on standard assumptions of earnings and fees and the minimum 9.5% superannuation contribution, a worker earning average weekly earnings over their working life is likely to accumulate only around $320,000 in today’s dollars for their retirement whereas a worker on the minimum wage of $695 per week, would only accumulate around $180,000 in today’s dollars. Withdrawing sufficient income to provide just a modest lifestyle in retirement ($25,000 – ASFA Retirement Standard), the accumulated superannuation of a worker on the minimum wage would last less than 10 years. It is obvious from these projections that any action which results in these workers losing even a small amount of their legal entitlements is going to have a devastating effect on their financial situation in retirement,’ he explains.

So what are some of causes of non-compliance by employers? 

Mr Olynyk says that in more than 50% of cases, it’s a result of mistake or deliberate non-payment, 30% is a result of the cash economy while the remaining 20% is due to sham contracting or employer insolvency.

‘The penalty for an employer not meeting their superannuation contribution obligations is liability to pay the superannuation guarantee charge.  Penalties also apply if the employer pays their superannuation contribution obligation but it’s not to the fund chosen by the employee,’ he says.

Currently the superannuation guarantee charge consists of three parts: the superannuation shortfall amount based on a broader base of salary and wages (rather than ordinary times earnings), nominal interest at 10% per annum from the period that the superannuation contributions were outstanding, and an administration fee of $20 for each employee per quarter. And if employers do not voluntarily comply with the obligation to lodge a superannuation guarantee charge statement, the ATO can levy additional penalties of up to 200%.

With compulsory superannuation embedded into Australia’s wages system for the past 25 years, there are questions around how non-compliant employers have managed to escape their obligations for so long.

Mr Olynyk says there’s a range of reasons.

‘These include time lags on the data that’s accessible to the ATO, employer insolvency, confusion over the definition between employee and contractor, and a general lack of employee knowledge and understanding about superannuation entitlements. It’s taken a number of damning reports – with accompanying media commentary – over the past two years to push the ATO’s recent announcement that they will now be adopting a much more proactive approach in superannuation guarantee compliance,’ he explains.

Some of the new tightening measures include monthly reporting of superannuation contributions by superannuation funds to the ATO, improved super guarantee reporting process from 1 July 2018, improving the effectiveness of the ATO’s recovery powers against director’s, and empowering the ATO to seek court-ordered penalties where necessary.

But employees can also play a proactive role in safeguarding their superannuation says Mr Olynyk.

‘This can be done by monitoring payslips and superannuation statements, reviewing work arrangements to ensure proper classification, improving knowledge and understanding of  superannuation entitlements and engaging with superannuation funds, reporting issues of non-compliance to the ATO as soon as a problem is detected, and seeking the services of a professional adviser.’

Mr Olynyk says Australia’s superannuation system can be complex and confusing but this is where the advice of an accountant or financial planner can make a significant difference.

‘It can be difficult for Australians to work out how to best maximise their superannuation funds at retirement let alone whether they’ve been receiving the correct entitlements. Financial planners play a critical role in working with a client to assist them in maximising their retirement savings and in taking advantage of wealth creating opportunities as well as ensuring their client receives their full employment and other legal entitlements.’

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