House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 4 - Simplification of superannuation guarantee earnings bases

Outline of chapter

4.1 Schedule 1 to this bill amends the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992) to simplify the earnings base of an employee for superannuation guarantee (SG) purposes. Specifically, the amendments will:

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remove provisions which currently allow earnings bases that existed prior to 21 August 1991 to be used to calculate an employer's contribution made in respect of an employee;

•

remove provisions which currently specify an earnings base for employers to calculate their contributions in relation to employee members of the Seafarers' Retirement Fund;

•

remove provisions which currently specify an earnings base for employers to calculate their contributions in relation to employee members of the Aberfoyle Award Superannuation Fund;

•

remove provisions which allow earnings bases specified in industrial awards, superannuation schemes, occupational superannuation arrangements or a law of the Commonwealth, State or Territory to be used for SG purposes; and

•

require all employers to calculate their SG liability against an employee's ordinary time earnings.

Context of amendments

4.2 The Treasurer announced in Press Release No. 011 of 25 February 2004 changes to provide a more flexible and adaptable retirement income system. The announcement included the Government's decision to simplify the earnings base provisions of the SGAA 1992 by removing earnings bases that existed before 21 August 1991.

4.3 The SG arrangements currently require employers to provide a prescribed minimum level of superannuation contributions for their eligible employees. The required minimum rate of superannuation contributions is 9% of an employee's notional earnings base.

4.4 The SGAA 1992 was developed in the context of the occupational superannuation arrangements that existed in the early 1990s. To minimise the impact on business at that time, the SGAA 1992 recognised earnings base provisions that existed prior to 21 August 1991 and allowed these to be used as the basis for determining an employer's SG obligation.

4.5 Employers who contribute for the benefit of employees without a pre-21 August 1991 earnings base are subject to different rules. Employees without a pre-21 August 1991 earnings base will generally have an minimum earnings base equal to their ordinary time earnings.

4.6 As pre-21 August 1991 earnings bases are generally less than ordinary time earnings, some employers are currently able to pay lower superannuation contributions for their employees than other employers in the same industry.

Summary of new law

4.7 The amendments will remove the current earnings base provisions from the SGAA 1992. The effect of these changes is that the amount against which an employer calculates the contribution necessary to meet their SG obligations in respect of an employee is standardised to ordinary time earnings for all employees. Employers could continue to use notional earnings bases specified in legislation or industrial agreements where these are above an employee's ordinary time earnings; however, any liability to pay the SG charge would only be assessed against ordinary time earnings.

4.8 Standardising the earnings base used to determine SG obligations to ordinary time earnings extends to the removal of references to industrial agreements, laws of the Commonwealth, State or Territory, an applicable superannuation scheme or retirement savings account from the provisions relating to earnings bases. These instruments currently prescribe notional earnings bases for SG purposes.

4.9 These amendments will apply from 1 July 2010. This will allow employers and employees time to adjust to the new employment arrangements and build, if necessary, the increased superannuation contributions into their wage bargaining processes.

Comparison of key features of new law and current law

Detailed explanation of new law

4.10 The amendments remove the mechanism for determining the notional earnings base of an employee by repealing sections 13, 13A, 13B and 14 of the SGAA 1992. Standardising the amount against which SG liability should be assessed to ordinary time earnings reduces complexity for employers, ensuring that employers only need consider ordinary time earnings as opposed to potentially multiple earnings bases for a variety of employees. Standardising earnings bases to ordinary time earnings means that where employees perform the same work under the same remuneration arrangements they can expect to receive SG contributions calculated against the same amount. [Schedule 1, item 5]

4.11 To ensure that employers still have a mechanism for reducing their charge percentage, section 23 of the SGAA 1992 will be amended. The amendments will remove subsections 23(2) to (5) and (9). The amendments will insert new subsection 23(2). This new subsection will provide a rule to reduce the charge percentage by a number calculated as:

(contributions made in respect of an employee / the ordinary time earnings of that employee) * 100


[Schedule 1, item 6, subsection 23(2)]

Example 4.1

Jessica's ordinary time earnings for a quarter is $4,000. Jessica's employer, Clancy, contributes $360 to an approved superannuation fund for the benefit of Jessica on the last day of the quarter. Applying the formula in subsection 23(2) Clancy can reduce his charge percentage by 9 percentage points.

(360 / 4,000) * 100 = 9


4.12 Subsection 23(3) ensures that the charge rate is also reduced by any reduction allowed under section 22, which sets out the reduction mechanism where contributions are made to a defined benefit fund. [Schedule 1, item 6, subsection 23(3)]

4.13 Existing subsections 23(2) to (5) and subsection 23(9) will be redundant as they provide a reduction mechanism depending on the instrument in which a notional earnings base is specified. [Schedule 1, items 6 and 7]

Application provisions

4.14 The amendments will apply from 1 July 2010. [Subclause 4(3)]

Regulation impact statement

Issue/Background

4.15 The Superannuation Guarantee (Administration) Act 1992 (SGAA 1992) permits the use of reduced notional earnings bases as set out in an industrial award or statute that applied before 21 August 1991. This creates complexities and inequities within the SG system.

4.16 When calculating an employers SG liability, complexities arise for both employers and the Australian Taxation Office (ATO) in determining whether employers are entitled to use a reduced notional earnings base for their employees.

4.17 For example, the ATO will need to determine the appropriate notional earnings base for calculating an employer's liability to the SG charge when auditing compliance with the SG arrangements. This can require determining whether the employer is entitled to use a pre-1991 earnings base and, if so, the nature of that earnings base. Complexities for employers can also arise when businesses change ownership - in particular, the new owners will need to determine the appropriate earnings base to use in calculating the minimum superannuation contributions needed to avoid the SG charge.

4.18 Inequities arise when employees who earn equivalent amounts are entitled to differing levels of compulsory contributions based on their occupation, the composition/structure of their earnings, and/or the operation of an arrangement that commenced prior to them commencing work.

4.19 The interaction of the SGAA 1992 and award and statute provisions more generally also creates complexities around the relevant level of superannuation contributions payable under this Act to reduce or remove an employer's SG liability.

4.20 As the current arrangements are bound in legislation, addressing the anomalies present in the notional earnings base provisions of the SGAA 1992 requires direct Government intervention.

Policy objective

4.21 The policy objective is to remove the complexity and inequity present in the current SG notional earnings base arrangements under the SGAA 1992. The basic principle underpinning this objective is that persons on similar overall levels of remuneration should receive similar levels of compulsory employer superannuation contributions.

Implementation options

Retain the current arrangements

4.22 There would be no change to the existing arrangements. That is, some employers could continue to use pre-21 August 1991 earnings bases in respect of their employees. Under the current provisions of the SGAA 1992, employers could potentially reduce their compulsory superannuation contributions through the use of workplace agreements.

Adopting ordinary time earnings as a standardised earnings base

4.23 Remove all references to industrial awards and statutes from the SGAA 1992 and adopt ordinary time earnings as the standard notional earnings base. This option proposes that the minimum notional earnings base of an employee be their ordinary time earnings.

Adopting salary and wages as a standardised earnings base

4.24 Remove all references to industrial awards and statutes from the SGAA 1992 and adopt salary or wages as the standard notional earnings base. This option proposes that the minimum notional earnings base of an employee be the total of their salary and/or wages.

Assessment of impacts

Impact group identification

4.25 There will be three main impact groups affected: employers who have SG obligations (this will be the vast majority of employers), employees who are entitled to superannuation contributions under the SG arrangements and the Australian Government.

Option 1 - Retain the current arrangements

Employers

4.26 Some employers will have an SG liability below that of others in equivalent circumstances. Determining the correct earnings base will remain complex.

Employees

4.27 The inequality in the level of contributions between equivalent employees will not be reduced. Salary and wage growth may compensate, to some degree for forgone contributions.

Government

4.28 Maintaining the current arrangements may lead to greater reliance on the age pension by affected employees. Government revenue will not be affected in the short term.

Option 2 - Adopting ordinary time earnings as a standardised earnings base

Employers

Benefits

4.29 Employers will experience reduced complexity in determining the correct earnings base. This will be because all employees will have an earnings base of ordinary time earnings under this option rather than each employee having potentially different earnings bases depending on their industrial award, superannuation fund trust deed or law which may currently prescribe earnings bases.

Cost

4.30 However, some employers will be required to make increased contributions if they are currently using an earnings base less than ordinary time earnings. These employers will also experience some initial administrative costs associated with system adjustments to determine the ordinary time earnings of each employee. The adjustment will only affect employers who need to capture different amounts. For instance an employer who currently does not capture a payment in calculating superannuation contributions that form part of an employee's ordinary time earnings will have to adjust their systems to capture that payment.

Employees

Benefit

4.31 The inequality in the level of contributions between equivalent employees will be removed, resulting in higher retirement savings for affected employees. Employees who currently have their superannuation calculated on an earnings base less than ordinary time earnings may receive higher contributions.

Cost

4.32 The additional increase in superannuation contributions may displace salary and wage increases.

Government

4.33 The increase in contributions will help reduce reliance on the aged pension. The increase in concessionally taxed contributions will reduce aggregate taxable income and lead to lower tax revenue.

Option 3 - Adopting salary and wages as a standardised earnings base

Employers

Benefit

4.34 Employers will experience reduced complexity in determining the correct earnings base. This will be because all employees will have an earnings base of ordinary time earnings under this option rather than each employee having potentially different earnings bases depending on their industrial award, superannuation fund trust deed or law which may currently prescribe earnings bases.

Cost

4.35 Some employers will be required to make increased contributions if they are currently using an earnings base less than salary and wages, although these may partially be absorbed through lower pay outcomes. These employers will also experience some initial administrative costs associated with system adjustments to determine superannuation contributions based on the salary and wages of each employee. The adjustment will only affect employers who need to capture different amounts. For instance an employer who currently does not capture a payment in calculating superannuation contributions, that form part of an employee's salary and wages, will have to adjust their systems to capture that payment.

Employees

4.36 The inequality in the level of contributions between equivalent employees will be removed. Employees who currently have their superannuation calculated on an earnings base less than salary and wages may receive higher contributions, resulting in higher retirement savings.

4.37 The additional increase in superannuation contributions may displace salary and wage increases.

Government

4.38 The increase in contributions will help reduce reliance on the aged pension.

4.39 The increase in concessionally taxed contributions will reduce aggregate taxable income and lead to lower tax revenue. This transfer will be greater with an earnings base of salary and wages than it would be if an earnings base of ordinary time earnings is adopted.

Limitations of the impact analysis

4.40 Very limited actual data was available on the extent of use of pre-1991 award provisions and thus the revenue estimates should be regarded as indicative only. The limited data available to assess the increase in contributions does not suggest how the contributions are distributed among affected employers.

4.41 The estimation of the average marginal tax rate of those affected assumes no difference in average marginal tax rate by industry.

4.42 Calculating the number of potential losers under such a policy is difficult, as some employers may pay the additional cost of superannuation themselves, while others may take the additional cost from an employee's cash pay.

4.43 The estimates of the revenue impact of option 3 reflect an assumption that no employers currently paying SG under an ordinary time earnings earnings base would move to a salary and wages earnings base in the first three years of the policy. The relatively small adjustment to SG contributions required in moving from an ordinary time earnings to a salary and wages base means that the change could be accommodated in a single enterprise agreement. In comparison, the larger increase in contributions required in moving from a grandfathered earnings base to either ordinary time earnings or salary and wages means that the change would likely occur over two enterprise agreements.

4.44 The degree of the impacts of the respective measures effecting the reliance on the age pension is unquantifiable. While increased contributions will lead to higher retirement savings, without knowledge of the other private savings of individuals affected by this change it cannot be ascertained how pressure on the age pension will change other than that it must result in some degree of alleviation.

Consultation

4.45 In July 2003, officers from the Department of the Treasury and the Department of Employment and Workplace Relations undertook consultations with industry groups that could be affected by the removal of the reduced notional earnings base provisions.

4.46 It was found that usage of the lower earnings bases varies considerably between and within industries. Overall, it was estimated that around 5% of businesses would use pre-1991 earnings bases. Usage has declined substantially since the SG legislation was introduced, particularly as companies have moved to enterprise agreements. However, in some instances employers consider the lower SG earnings bases a useful bargaining tool, with the incentive of higher superannuation used to encourage employees to move onto agreements.

4.47 Specific industry associations were generally more comfortable with a move to a simplified earnings base, particularly if sufficient lead-time was provided. However, a minority were outwardly opposed to the change as additional contributions would be necessary in their circumstances. In arriving at the recommendation below it was considered that equality for employees was of paramount importance.

Conclusion and recommended option

4.48 The preferred option is option 2, which removes all references to industrial awards and statutes from the SGAA 1992 and adopts ordinary time earnings as the standard notional earnings base.

4.49 This option would remove the complexity and inequity present in the current arrangements without imposing the same level of cost on employers and Government as an earnings base, based on total salary and wages' would.