Significant amendments to legislation commence on 1 July 2008 which affect how the minimum amount of compulsory superannuation guarantee (SG) contributions are calculated by employers.
The amount of SG contributions employers are currently required to make is nine per cent of each employee’s ‘notional earnings base’.
What an employee’s ‘notional earnings base’ is depends on the circumstances. A concessional or grandfathered earnings base may apply in some cases:
- if ‘salary’ is set out for superannuation contribution purposes in an industrial award, or
- if an arrangement was in place before 21 August 1991 under which the employer (or a predecessor employer) was making superannuation contributions for employees in accordance with an occupational superannuation arrangement, the applicable superannuation scheme or a law of the Commonwealth, state or territory.
It is often valuable to an employer to be able to utilise a concessional earnings base as it can represent significant cost savings compared with paying nine per cent on a higher earnings base.
If there is no concessional earnings base available to an employer, then the default earnings base is ‘ordinary time earnings’ (OTE) as defined in the Superannuation Guarantee (Administration) Act 1992 (Cth) (SG Act).
Currently, the rules concerning concessional earnings bases are extremely complex and cause a great deal of confusion, especially if a connection back to August 1991 needs to be established. It seems that partly for this reason, and probably also because sufficient time has elapsed since the SG regime commenced, amendments were made in 2004 to remove all the concessions so as to ensure that from 1 July 2008 OTE is the only earnings base that will apply for the purposes of calculating SG contributions.
OTE is defined to mean the total of earnings in respect of an employee’s ordinary hours of work (other than lump sum payments made on termination of employment in respect of unused sick leave, annual leave or long service leave) and importantly includes over-award payments, shift-loading and commissions. There is an Australian Taxation Office (ATO) SG ruling which provides detail on the ATO’s views as to which types of other payments are caught by the OTE definition.
Allowances, bonuses and commissions are frequently aspects of remuneration which are excluded from concessional earnings bases, but which will generally be required to be included in OTE from 1 July 2008. Therefore, the change could be costly for employers in some sectors.
While the changes will not affect all employers, employers will need to ensure that the level of superannuation contributions they are currently making is equivalent to at least nine per cent of an employee’s OTE. If not, the level of superannuation contributions will need to be adjusted from 1 July 2008. If an adjustment is required but not made, significant penalties may apply.
If an employer is currently using a concessional earnings base for its employees, the employer’s SG Act obligations in respect of those employees will most likely increase from 1 July 2008.
- For accumulation-style members, this will result in higher contributions.
If contributions need to be increased, this could mean that:
- for remuneration packages expressed to be ‘inclusive’ of superannuation, an employee’s ‘take-home pay’ will be reduced, and
- for remuneration arrangements which are exclusive of superannuation, additional costs will be incurred by the employer.
- For a defined benefit fund, the actuary’s benefit certificate will continue to be used to determine whether there is a ‘shortfall’ in respect of employees for SG Act purposes. Of course, reliance on the actuary’s certificate is only possible if the certificate is based on accurate information which means that the certificates will have to be re-issued on the basis of OTE if another earning base is presently being used. As with accumulation members, this could result in higher employer contributions being required.
We understand that the Australian Institute of Actuaries is working with government to iron out the details of the new SG Act regulations which will be relevant to the issuance of the new benefit certificates.
Trustees of defined benefit funds will also want to ensure that the change to OTE does not affect the fund’s funding position. The trustee may also need to obtain actuarial advice on this issue.
Employers will need to ensure that their payroll systems and processes are updated to take account of the changes. In some cases, depending on how complex the remuneration structure is, employers may need to undertake a detailed analysis of the various components of remuneration payable to employees to ensure that the components which fall within OTE are captured. Given the looming deadline, employers should start preparing now.
More information
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