Employers.
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Partner
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Sydney
Andrew Gray
Melbourne
Murray Kellock
Author
Michael Chaaya
The pace of superannuation reform continues with a number of proposals and recent changes that will affect the way employers are required to satisfy their superannuation obligations. The changes relate to the calculation of superannuation guarantee (SG) contributions, an extension of the SG late payment offset, the taxation of employment termination payments, and the introduction of a Superannuation Clearing House.
Calculation of superannuation guarantee contributions
The minimum superannuation contributions required to be made by an employer is 9% of each eligible employee's "notional earnings base". At present, an employer can use a grandfathered earnings base which is less than "ordinary time earnings" (OTE). From 1 July 2008, employers will no longer be able to use an earnings base other than OTE to determine whether they have satisfied their SG obligations.
OTE generally refers to what an employer pays to an employee for ordinary hours of work, including over-award payments, commissions, allowances and paid leave (but excluding lump sum payments made on termination of employment in respect of unused sick leave, annual leave or long service leave). The ATO's view of what is included in OTE is set out in SGR 94/4 - for a copy of the Ruling click here.
The changes will not affect the maximum contribution base. The notional earnings base of an employee in a contribution period is subject to a maximum contribution base which is indexed annually to AWOTE. For 2007/08, the maximum contribution base is $36,470 for each quarter. This means an employer is not required to pay contributions under SG for any earnings above this limit. Note that this limit does not apply to other mandated contributions such as those paid under an award.
SG late payment offset
Since 1 January 2006, an employer who makes a late contribution to an employee’s superannuation fund within one month after the due date has been able to use that late payment to offset against part of their SG charge for that employee. The late contribution can only be offset against an SG charge which relates to the same quarter and to the same employee.
As part of the Tax Laws Amendment (2008 Measures No.2) Bill 2008, the Government proposes to extend this late payment offset facility such that any contributions made after the due date for a quarter can be offset against the SG charge liability for that quarter in respect of the relevant employee. It is noteworthy that the interest and administration components of the SG charge are still required to be paid by the employer and penalties can be imposed by the ATO for late payments. Further, the late payment offset and the SG charge are not deductible to the employer.
The Bill passed the House of Representatives on 14 May 2008 and awaits introduction in the Senate.
Employment termination payments
As part of the changes to the taxation of superannuation in Australia introduced from 1 July 2007, employers need to be mindful of the new rules for “employment termination payments” (ETP). This concept has replaced eligible termination payments and is generally defined as a lump sum payment made in consequence of the termination of employment, and made by an entity other than a superannuation entity. It does not include payment for unused annual leave, unused long service leave, the tax-free part of a redundancy payment or early retirement scheme payment.
ETPs received in a given year will receive concessional tax treatment for amounts paid below a cap which is presently set at $140,000 (subject to indexation). ETPs made after 1 July 2007 (other than those made under the transitional arrangements explained below) will not be able to be rolled over into superannuation.
Special arrangements will apply to ETPs that satisfy the transitional rules for payments made between 1 July 2007 and 30 June 2012 (known as “transitional termination payments”). For example, an employee can direct that their transitional termination payment be made to a complying superannuation fund or to the purchase of an annuity, in which case the payment will be known as a “directed termination payment”. Directed termination payments are not assessable income of the recipient, but are taxed in the hands of the superannuation fund.
Superannuation Clearing House
As part of the 2008/09 Federal Budget, the Government has announced that it will introduce a Superannuation Clearing House from 1 July 2009. This optional facility will allow employers to pay superannuation contributions for employees to one location, instead of having to pay the contributions to a large number of different superannuation funds chosen by the employees under choice of fund. The Clearing House will then distribute the contributions to the relevant chosen superannuation funds.
This facility will be offered at no charge to small businesses with less than 20 employees, and will be offered on a fee-for-service basis to larger businesses. The Government proposes to consult with industry prior to implementing this reform initiative.