By Annie Smeaton (Partner), Belinda Winter (Partner) and Fletch Heinemann (Partner) of Cooper Grace Ward.
On 24 May 2018, the Government first introduced a 12-month superannuation guarantee amnesty. The relevant Bill failed to pass the Senate and then lapsed when the federal election was called on 11 April 2019.
On 18 September 2019, the Bill was re-introduced, with an amnesty period beginning on 24 May 2018 and ending six months after the legislation receives Royal Assent.
The amnesty is being offered as a last chance for employers. In this version of the amnesty, if a taxpayer doesn’t take advantage of the amnesty in relation to historical shortfalls, they will be subject to a penalty of up to 200%. And the Commissioner will lose the power to remit that penalty below 100% for historical quarters.
There are a number of areas where the obligation to pay compulsory superannuation is not clear-cut. The most common mistakes, where well-meaning businesses have inadvertently underpaid compulsory superannuation, are set out below.
Trap one – not understanding ordinary time earnings
There should be no superannuation guarantee charge when compulsory superannuation is paid on time, at the correct rate, on ‘ordinary time earnings’.
‘Ordinary time earnings’ means the earnings in respect of the ordinary hours of work. The difficulty in some cases is assessing what hours of work are ‘ordinary’. Overtime is generally not ‘ordinary hours’, but complications can arise when:
- a workplace agreement prevails over an award, so that it is not clear what hours are ordinary and what hours are overtime
- hours are designated as ‘overtime’ but are paid at the same rates as normal hours
- there is no award and no agreement, in which case all hours may be ‘ordinary hours’.
The worst cases we have seen are businesses paying compulsory superannuation on 38 hours per week, when in fact all hours were ‘ordinary hours’. A mistake like this, multiplied across a workforce, can produce a significant superannuation guarantee charge bill.
You can read more about compulsory superannuation on overtime amounts here.
Trap two – contractors who are actually employees
Whether an individual is an employee or independent contractor continues to be the subject of many disputes.
The ATO provides a list of factors that they consider when assessing whether an individual is an employee or independent contractor. These factors are:
- the intention of the parties, as shown in the terms and circumstances of the formation of the contract
- who exercises control over the individual’s work
- whether the individual operates on his or her own account or in the business of the payer – particular risk areas here include uniforms and email signatures
- whether the individual is paid for ‘results’ contracts
- whether the work can be delegated or subcontracted
- who bears the commercial risk
- who provides tools and equipment and who pays business expenses
- other indicators, such as leave.
The list is a helpful overview of the factors to consider. However, applying these factors to a particular individual’s circumstances can be much more difficult. Extreme care should be taken when using the ATO’s online calculator. While it generally produces the correct answer in clear-cut cases, it does not properly analyse border-line cases. It is also not binding.
There has also been a recent trend in the case law where a further test has been introduced: whether the individual is carrying on a business. This is a different test compared to the ATO’s consideration of the factors (above) about whether the individual is acting on their own account. On the business test, if an individual is not carrying on a business, they are an employee.
We have seen a number of unfortunate cases where the ATO (or OSR) has concluded that individuals who were treated as contractors were actually employees.
Trap three – deemed employees
The superannuation guarantee charge legislation deems certain contractors to be employees. This applies to genuine independent contractors. The list of deemed employees includes:
- board members
- individuals who work under a contract that is wholly or principally for their labour
- various MPs, members of Legislative Assemblies and other officials
- anyone paid to perform or present any music, play, dance, entertainment, sport, display or promotional activity – and anyone paid to provide services in connection with one of those (you can read more here)
- anyone paid to perform services in connection with the making of any film, tape or disc or of any television or radio broadcast.
For individuals providing professional services, the issue is often whether they are being paid wholly or principally for their labour.
Advantages and risks with the amnesty
The amnesty offers a number of incentives. The table below sets out the advantages of the amnesty.
|Factor||Amnesty conditions||Normal conditions|
|SGC shortfall||Deductible*||Not deductible|
|Contributions offset against SG charge||Deductible*||Not deductible|
|Admin component||Waived||$20/per employee/per quarter|
|Nominal interest||Still applies||Still applies|
|Part 7 penalties||Waived||Maximum penalty is 200% of the SGC. |
The amnesty will result in the Commissioner losing the ability to remit the penalty below 100% for historical quarters in all but “exceptional circumstances”
|Payment plan|| Amnesty conditions fail if: |
payment is not made by the end of the amnesty period, or
a payment arrangement is not in place by the end of the amnesty period.
|Subject to the usual ATO debt policies|
For the payments to be deductible, the payments must be made within the amnesty period. This means that if a payment plan extends beyond the amnesty period, the payments made after the end of the amnesty period will not be deductible.
The main risk with the amnesty is making a disclosure and then being unable to pay the superannuation guarantee charge. There is no guarantee that the ATO will enter into an acceptable payment arrangement. This can have serious consequences, including that the benefits of the amnesty will not apply. The business may then be insolvent if it cannot pay its debts as and when they become due and payable.
As noted above, the Bill provides for an additional incentive (in the form of a stick) to disclose within the amnesty period by limiting the ATO’s ability to remit penalties for periods covered by the amnesty.
This means that, if assessments are issued for quarters covered by the amnesty (those starting on or before 1 January 2018), the penalties generally cannot be reduced below 100%. There is an exception for ‘exceptional circumstances’.
The explanatory memorandum gives an example of a natural disaster preventing the disclose of shortfalls as ‘exceptional circumstances’.
Qualifying for the amnesty and identifying risks
To qualify for the amnesty, the disclosure must:
- be made before the end of the amnesty period (6 months from the date of Royal Assent)
- contain information that has not previously been disclosed to the ATO
- be made in the approved form, which will generally include the super guarantee charge statement
- relate to the March 2018 and earlier quarters – quarters within the amnesty period are not eligible for the amnesty
- be made before the ATO advises of any review or audit of super guarantee charge obligations (commonly referred to as an ‘employer’s obligations’ audit).
Businesses that have identified risks should take steps to remove (or reduce) those risks in the future. There are a number of options depending on the type of risk identified.
Cooper Grace Ward disclaimer
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.
This article originally appeared on the Cooper Grace Ward website and has been reproduced with permission.