Touching base on super guarantees

Employer companies relying on grandfathered notional earnings bases for calculation of their superannuation guarantee (SG) contributions should check that they are still entitled to rely upon the bases. The ability to rely on a grandfathered base is due to end on June 30, 2008, but there may be cases where employer companies have already lost the right to rely upon the base with potentially expensive consequences.

1. What is a grandfathered notional earnings base?

Under the Superannuation Guarantee (Administration) Act 1992 (SGAA), employers may avoid the obligation to pay the SG charge to the Australian Taxation Office by making contributions of superannuation on behalf of their employees to a complying superannuation fund.

The usual position is that contributions are required at the rate of 9 per cent of ordinary time earnings. Ordinary time earnings include commissions and most types of bonuses and allowances as well as income for ordinary hours of work.

However, if an employer was contributing for superannuation on behalf of its employees pursuant to an arrangement that was in place on August 21, 1991, the employer can continue contributing pursuant to that arrangement (including for those employees who join later) provided that nothing has occurred to narrow the base.

The arrangement can be in the form of a particular employment contract, an award or other industrial arrangement, or a superannuation scheme (eg, a superannuation fund).

In many cases, employers were parties to superannuation schemes that required them to contribute to schemes based on the definition of ‘fund salary’ in the relevant superannuation deeds. It was usual for deeds at the time to exclude from ‘fund salary’ any bonuses, allowances or commissions. This is narrower than the definition of ordinary times earnings in the SGAA and, accordingly, an employer who is still able to contribute on this narrower base may have significant cost savings.

2. Tracing the base through transfers and acquisitions

The ability to rely upon a grandfathered base flows through to current employers and current funds from predecessor employers and funds provided that, in the case of a predecessor employer, the current employer purchased the business or an asset from the predecessor employer (and acquired employees in the process), and in the case of a fund, the predecessor fund transferred the employee benefits to the current fund. These transfers must have taken place after June 28, 1994.

The ability to rely upon the base can also be traced through to where an employee exercises a choice under the recent choice of fund amendments to the SGAA. It is important to note that if an employer allowed an employee to exercise choice prior to these amendments, the base cannot be traced through to the chosen fund.

3. How can the base be lost?

There are a number of ways in which the ability to rely on a grandfathered base can be lost.

First, the SGAA itself provides that the base will be lost if something is done which narrows the base. An example of how this might occur is where an employer introduces a concept of total remuneration package or total remuneration cost and purports to calculate superannuation contribution based on a notional salary that is less than the previous salary upon which the calculation was based.

Secondly, the base will be lost if the employees were transferred to the current employer pursuant to a contract for the acquisition of the business in which those employers were employed, and the transfer took place after August 21, 1991, but before June 28, 1994. Likewise, if the members and their assets were transferred to a new fund between those two dates, the ability of their employer to rely upon a grandfathered base would have been lost.

Thirdly, the transfer of members from one fund to another must have involved a replication of the rights and benefits of the members and the agreement of the two trustees to such replication. If either of these elements is absent, the ability will be lost.

Fourthly, where the company has taken over another company by way of a share transfer and the acquired entity has a grandfathered base, new employees working in the business of the acquired entity should be employed by the acquired entity. It is not possible for the acquiring entity or some other related party of the acquiring entity to employ new employees and make contributions based on the grandfathered earnings base of the acquired entity.

Finally, the employer must continue to rely upon the grandfathered earnings base for the purposes of contributions.

4. Consequences of losing the base

Losing the base can have draconian consequences for the employer. If an employer has a SG shortfall for a quarter, it must lodge a SG statement setting out its liability to a SG charge. This is due on the 14th day of the second month following the end of the quarter.

The first step in this statement is to calculate the amount of ordinary time earnings of the relevant employees. Most types of bonuses, allowances and commissions not previously counted would have to be included.

Once this calculation is made, the amount actually contributed for superannuation as a percentage of that amount is calculated. The difference between this percentage and the percentage that should have been paid (currently 9 per cent) is the shortfall percentage. This shortfall percentage is then applied to a wider concept known as ‘salary or wages’. This is similar to ordinary time earnings, but includes other amounts such as amounts payable on termination of employment. This gives the shortfall amount for the relevant period.

Interest is then charged against the shortfall amount at the rate of 10 per cent per annum to compensate the employee for loss of fund earnings and an administration charge (which is currently $20 per employee) is added. This becomes the SG charge that must be paid to the Australian Taxation Office for each employee.

It is important to note that the amount payable is not tax deductible. The Australian Taxation Office may also apply penalties. A maximum penalty of 200 per cent of the SG charge applies for failure to provide a SG statement when due. There may also be penalties for specific offences such as a failure to keep proper records. The Australian Taxation Office applies penalties in accordance with its policy outlined in SGR 94/3. This allows for a reduction in penalties where voluntary disclosure is made.

5. Recourse against employees

Often an employer who is required to pay a shortfall amount to the Australian Taxation Office for an employee will have made its superannuation contributions in accordance with the terms of the contract of employment between it and the employee. It may be the case that employer and employee have agreed that superannuation contributions will be made on a particular basis that is strictly followed by the employer, but is not in accordance with the law. An example is where the employer has mistakenly relied upon a grandfathered earnings base that it is no longer entitled to rely on.

In this case, the employee makes a windfall gain. If the employer was aware that the grandfathered earnings base was no longer available to it, it would likely have entered into some other arrangement with the employee; for example, it may have reduced the actual cash component of the employee’s remuneration and increased the superannuation component. By contributing to the Australian Taxation Office on the employee’s behalf, the employee will get both the full cash component and the additional superannuation.

Mistake of law is an established basis for restitution for unjust enrichment. Here the argument would be that the employee is unjustly enriched. If this is correct, the overpayment could be recovered by the employer from the employee. Of course, it is unlikely that most employers who are required to make contributions to the Australian Taxation Office will turn around and sue their employees to recover the contribution, but the possibility of taking such action might be used in the course of negotiating future entitlements, or might be applied against former employees or current employees who leave employment in circumstances where damage is caused to the employer.

6. Conclusion

Employers who are making contributions for superannuation on the basis of a grandfathered earnings base should check that they have not lost the right to do so. If they have doubts, they should consider the potential cost and whether disclosure ought to be made to the Australian Taxation Office.

Michael Fernon is a partner at law firm Freehills.