Explanatory Memorandum
(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)Superannuation Guarantee amendments
Summary of the amendments
Liability of Commonwealth authorities
13.1 The proposed amendment will make it clear that certain statutory authorities whose enabling legislation otherwise exempts them from Commonwealth taxation will be liable for the Superannuation Guarantee charge [Clause 73] .
13.2 1 July 1993
Background to the legislation
13.3 The Superannuation Guarantee scheme is intended to apply to all employers (including, although with some modifications, the Commonwealth and tax exempt Commonwealth authorities) in respect of their full time, part time and casual employees, with only limited exemptions available. It is not appropriate that these exemptions should extend to the Superannuation Guarantee charge liability payable by statutory organisations, as employers, even though they may have provisions within their enabling legislation purporting to exempt them from various Commonwealth, State and Territory taxes.
Explanation of the amendment
13.4 Both the Commonwealth and tax-exempt Commonwealth authorities are employers for the purpose of the Superannuation Guarantee (Administration) Act 1992 (SGAA). However, the Commonwealth cannot impose the Superannuation Guarantee charge upon itself. New section 5 (which, apart from removing the reference to tax-exempt Commonwealth authorities, is the same as existing section 5) ensures that the Commonwealth is treated the same as other employers by providing that all provisions of the SGAA (other than those imposing liability for the charge or penalties or allowing appeal and review rights) are taken to apply to the Commonwealth [Clause 74; New section 5] .
13.5 A Commonwealth authority, which is defined to mean an authority or body that is established by or under a law of the Commonwealth, which is exempt from taxes under the laws of the Commonwealth will not be exempt from the Superannuation Guarantee charge unless the law or provision expressly in its enabling legislation exempts the authority from liability to pay the charge [Clause 75; New section 5A] .
Ordinary time earnings
13.6 The proposed amendment will exclude lump sum payments for accrued annual leave, accrued long service leave and accrued sick leave on termination of employment from the definition of ordinary time earnings [Clause 76] .
13.7 1 July 1993
Background to the legislation
13.8 Under the SGAA an employer's contributions are measured against the employee's notional earnings base . The expression notional earnings base is the earnings of the employee by reference to which the employer's superannuation contribution is calculated. Several earnings bases are available for an employer to use, such as the base set out in the superannuation fund deed, industrial award or an agreement with the employee.
13.9 If there is no acceptable earnings base relevant to a particular employee, then the employee's ordinary time earnings are used. The principal reason for adopting ordinary time earnings as a default base was to achieve consistency with the award superannuation system.
13.10 Subsection 6(1) of the SGAA provides that ordinary time earnings , in relation to an employee, means:
- (a)
- the total of:
- •
- earnings in respect of ordinary hours of work; and
- •
- earnings consisting of over-award payments, shift loading or commission; or
- (b)
- if the total ascertained in accordance with paragraph (a) would be greater than the maximum contribution base for the contribution period - the maximum contribution base. The maximum contribution base, which is increased annually by an indexation factor based on movements in Average Weekly Ordinary Time Earnings, is $20 160 per quarter for the 1993-94 income year.
13.11 Ordinary hours of work, as stated above, may be specified in a statute or under an industrial award. If an employee is not covered by an award but has agreed to work a certain number of hours, those hours are the employee's ordinary hours of work. However, if there is no specific agreement, the ordinary hours of work will be the hours actually worked and any hours of paid leave.
13.12 Lump sum payments on termination of employment in respect of accrued long service leave, accrued sick leave and accrued recreation leave are currently included in the definition of ordinary time earnings.
Explanation of the amendment
13.13 The definition of ordinary time earnings in subsection 6(1) of the SGAA will be amended to exclude the following lump sum payments made to employees on termination of their employment:
- •
- lump sum payments in lieu of unused sick leave;
- •
- lump sum payments in lieu of unused annual leave, within the meaning of subsection 26AC(1) of the Income Tax Assessment Act 1936 (ITAA) ; and
- •
- lump sum payments in lieu of unused long service leave, within the meaning of subsection 26AD(1) of the ITAA.
[Clause 77; Amended definition of ordinary time earnings in subsection 6(1)]
Industrial award
13.14 The proposed amendment will allow the Fund Benchmark Salary Rate contained in an industrial agreement between an employer in the maritime industry and the Maritime Union of Australia to be an acceptable notional earnings base [Clause 78] .
13.15 1 July 1992
Background to the legislation
13.16 Employers in the Maritime industry make contributions to the Seafarer's Retirement Fund, which was established on 3 May 1973, based on the earnings of a standard employee. This earnings base, which is known as the Fund Benchmark Salary Rate, is set in the Seafarer's Retirement Fund industrial agreement rather than in an industrial award.
Explanation of the amendment
13.17 The definition of industrial award in subsection 6(1) of the SGAA will be extended to allow the Fund Benchmark Salary Rate contained in an industrial agreement between an employer in the maritime industry and the Maritime Union of Australia in respect of contributions to the Seafarer's Retirement Fund to be an acceptable notional earnings base for Superannuation Guarantee purposes [Clause 79; Amended definition of industrial award in subsection 6(1)] .
13.18 The proposal that this amendment operate with effect from 1 July 1992 has been agreed with representatives of the affected employer and employee groups.
Contractors
13.19 The proposed amendment will remove any doubt that payments made to contractors wholly or principally for their labour are salary or wages and is intended to ensure that the Superannuation Guarantee scheme operates as intended [Clause 80] .
13.20 1 July 1992
Background to the legislation
13.21 An employee is defined in subsection 12(3) of the SGAA to include a contractor who works under a contract which is wholly or principally for the labour of a person. A contract is considered to be wholly or principally for labour if more than half of the value of the contract is for labour. It was clearly intended that payments for labour under such contracts were to be subject to Superannuation Guarantee contributions.
13.22 However, as such payments are not specifically included in the definition of salary or wages in section 11, some employers are of the view that such payments are not to be taken into account for the purposes of calculating the Superannuation Guarantee shortfall.
Explanation of the amendment
13.23 Section 11 of the SGAA will specifically include as salary or wages payments made to contractors for their labour under a contract that is wholly or principally for the person's labour. This will remove any doubt that such payments are salary or wages for Superannuation Guarantee purposes [Clause 81; New paragraph 11(1)(ba)] .
13.24 This amendment is being made with effect from 1 July 1992 as the definition of an employee in subsection 12(3) of the SGAA includes a contractor who works under a contract that is wholly or principally for the labour of a person and makes it abundantly clear that these contractors were always intended to be within the scope of the Superannuation Guarantee arrangements.
Payments to the estate of a deceased employee
13.25 An employer will, in order to satisfy the employer's Superannuation Guarantee responsibility, be able to make payments directly to a deceased employee's legal personal representative where the employee dies before the employer makes contributions to a superannuation fund on behalf of the employee [Clause 82] .
13.26 1 July 1992
Background to the legislation
13.27 The SGAA specifies the amount of the superannuation contribution that an employer must provide for his or her employees if the employer wishes to avoid the Superannuation Guarantee charge. A problem arises when the employee dies before the employer makes contributions to a superannuation fund in order to satisfy the Superannuation Guarantee requirements. Most superannuation funds are unwilling or unable to accept these contributions after the death of an employee. In this situation the employer has no choice but to pay the charge to the Australian Taxation Office (ATO).
Explanation of the amendment
13.28 Payments to the legal personal representative of a deceased employee will be deemed to be contributions to a complying superannuation fund for the benefit of the employee for Superannuation Guarantee purposes where:
- •
- the employee has died; and
- •
- if the employee had not died, the employer would have made a contribution to a complying superannuation fund for the benefit of the employee in order to satisfy the employer's Superannuation Guarantee responsibility.
[Clause 83; New subsection 23(9A)]
13.29 This amendment is being made with effect from 1 July 1992 as it reduces the compliance costs of the measures for affected parties.
Contribution periods
13.30 The requirement that employers meet their Superannuation Guarantee obligations on a quarterly basis will be deferred until the 1994-95 financial year. Consequently employers could contribute the minimum level of superannuation support prescribed for their employees for 1993-94 on or before 28 July 1994 [Clause 84] .
13.31 1 July 1993
Background to the legislation
13.32 The level of superannuation support that an employer needs to provide in respect of each employee is measured on the basis of a contribution period . Subsection 6(1) of the SGAA defines contribution period to mean, so far as is relevant:
'a period of 3 months commencing on 1 July, 1 October, 1 January or 1 April in the 1993-94 year or any later year'.
13.33 From the 1993-94 income year, it was intended that the contributions were to be made on a quarterly basis. However, in order to develop and implement solutions to some concerns surrounding the Superannuation Guarantee legislation, particularly relating to small amounts, the introduction of quarterly contributions is to be deferred until the commencement of the 1994-95 income year.
Explanation of the amendment
13.34 Contributions made to a complying fund by an employer for the benefit of an employee in the period commencing on 1 July 1993 and ending on 28 July 1994 may be taken into account under section 23 of the SGAA as if they were made in any of the contribution periods in the 1993-94 income year. The provision is similar to subsection 23(6) which operated in respect of contributions for the 1992-93 income year [Clause 85; New subsection 23(6A)] .
13.35 The contributions may be made in the form of one or more payments during the year. Subsection 23(8) applies so that contributions which are taken into account in one contribution period cannot be taken into account in another contribution period. Therefore, a contribution made on 10 July 1993, for example, cannot be taken into account for both the 1992-93 and the 1993-94 years.
Reduction of notional earnings base and ordinary time earnings
13.36 The proposed amendment will ensure that the notional earnings base and ordinary time earnings of an employee whose status changes part way through a contribution period (because, for example, they turn age 65 during a contribution period) are calculated by reference to payments for that part of the period for which Superannuation Guarantee contributions have to be made [Clause 86].
13.37 1 July 1992
Background to the legislation
13.38 Sections 27 and 28 of the SGAA exclude certain payments from the salary or wages of an employee for the purposes of calculating the shortfall. For example, salary and wages for that purpose do not include payments to:
- •
- employees who are 65 or over;
- •
- employees under 18 who are working part time; and
- •
- employees who are remunerated for certain work performed overseas.
13.39 It is the intention of the SGAA that the Superannuation Guarantee charge not apply to salary or wages which are excluded under section 27 or section 28 for the purposes of calculating the shortfall under section 18 or section 19.
13.40 The current provisions do not adequately deal with situations where only part of the salary or wages received by an employee are excluded by section 27 or section 28. This situation arises where, for example, an employee turns age 65 part way through a contribution period (paragraph 27(1)(a)) or the salary or wages prescribed for the purposes of paragraph 27(1)(e) represents only part of the salary or wages paid by the employer to the particular employee.
13.41 In such cases, the exclusions from salary or wages for the purposes of section 18 or section 19 do not flow on to the calculation of the reduction in charge percentage under section 23. Consequently, the reduction of the charge percentage (which is based on the amount of contribution expected as a percentage of the notional earnings base) is incorrect because the notional earnings base is not reduced by the amount of salary or wages excluded under section 27 or section 28.
Explanation of the amendment
13.42 The notional earnings base of an employee will specifically exclude any payments that are excluded from salary or wages under section 27 and section 28 for the purpose of calculating the Superannuation Guarantee shortfall under section 18 or section 19 [Clause 87; New subsection 23(11)] .
13.43 Similarly, if the employer is contributing to a fund which does not have a notional earnings base, the ordinary time earnings of the employee will specifically exclude any amounts which are excluded from salary or wages under section 27 and section 28 for the purpose of calculating the Superannuation Guarantee shortfall under section 18 or section 19 [Clause 87; New subsection 23(12)] .
13.44 Consequently, employers will be liable for the Superannuation Guarantee charge only on salary or wages that are not excluded by section 27 or section 28.
Example: Calculation of the Superannuation Guarantee shortfall taking into account the reduced salary and wages for notional earnings base purposes
13.45 To illustrate the operation of the proposed amendment, assume an employer has a contribution period commencing on 1 July 1993 and ending on 30 September 1993. The amount of the employee's salary or wages in the contribution period, of $20 000, is reduced by $10 000 (because, for example, the employee turned 65 half way through the contribution period). Based on a reduced salary of $10 000, the appropriate amount of employer superannuation contributions to avoid the Superannuation Guarantee charge is $300 (assuming a charge percentage of 3%). The Superannuation Guarantee shortfall is calculated as follows:
| Salary or wages for contribution period | $20 000 |
| Reduced salary or wages | $10 000 |
| Notional earnings base | $20 000 |
| Reduced notional earnings base | $10 000 |
| Employer contributions | $300 |
| Employer's charge percentage | 3% |
| Actual superannuation support (300/10 000) | 3% |
| Shortfall Calculation ($10 000 x (3%-3%)) | $0.00 |
13.46 If the notional earnings base had not been reduced, the employer would have a shortfall of $150 and be liable for the Superannuation Guarantee charge.
13.47 This amendment is being made with effect from 1 July 1992 because it was never intended that the Superannuation Guarantee charge should apply to salary or wages excluded under section 27 or section 28 of the SGAA.
Flat dollar contributions and part-time employees
13.48 The proposed amendment will clarify the circumstances in which a notional earnings base specified in an industrial award can be used for Superannuation Guarantee purposes. A notional earnings base specified in an industrial award can be used only if the award was in place immediately before 21 August 1991 and contained flat dollar contribution provisions at that time.
13.49 The proposed amendment will also allow for flat dollar contributions for part-time employees to be referenced to the appropriate proportion of the notional earnings base rather than against the full notional earnings base [Clause 88] .
13.50 1 July 1993
Background to the legislation
13.51 Section 25A of the Act was introduced to ensure that certain industries would not be disadvantaged because the employer contributed a flat dollar superannuation amount under an existing award rather than linking the superannuation contributions to the earnings of a particular employee.
13.52 The intention of the Government has always been to limit the use of these flat dollar awards as they defeat the policy objective of aligning the employee's post-retirement income to a percentage of his or her pre-retirement income.
13.53 Nevertheless, there has been a view among some employers that section 25A is accessible to all awards that were in operation immediately prior to 21 August 1991 so that any award in place at that time could be amended to provide a flat dollar arrangement.
13.54 It was always intended that notional earnings bases would be adjusted for part-time employees. In this regard the Supplementary Explanatory Memorandum which accompanied Taxation Laws Amendment (Superannuation) Act 1992 , which inserted section 25A, states at page 6 that:
"The deemed notional earnings base provision in section 25A assumes both the employee for whom the employer is contributing and the standard employee are full time employees. Where this is not the case an appropriate adjustment would be made to the notional earnings base. For example, if an employee is a part time worker (working 20 hours per week) and the standard employee is based on the full time rate (say, 40 hours per week), the employee's notional earnings base will be reduced proportionally. That is, the employee's notional earnings base will be half of the standard employee's earnings."
13.55 It has been suggested that section 25A as presently drafted does not allow the intended apportionment of the notional earnings base.
Explanation of the amendments
13.56 The proposed amendment will ensure that only awards that contained the two conditions set out in paragraph 25A(1)(a) and paragraph 25A(1)(b) of the SGAA prior to 21 August 1991 will be able to specify flat dollar award superannuation contributions for Superannuation Guarantee purposes.
13.57 The two conditions, both of which must have been in place prior to 21 August 1991, are:
- •
- that the industrial award specifies a flat dollar superannuation contribution in relation to a class of employees; and
- •
- that the award (or another arrangement) provides that with every adjustment in earnings of a member of a specified class there is an adjustment in the flat dollar contributions made by reference to that increase.
[Clause 89; New paragraph 25A(1)(c), paragraph 25A(1)(d) and paragraph 25A(2)(b)]
13.58 New subsection 25A(3) will ensure that the notional earnings base of part-time employees is the appropriate proportion of the adjustment earnings as defined in paragraph 25A(1)(b).
13.59 If the employee is a full-time employee, the notional earnings base in relation to the contribution period will be the adjustment earnings in relation to the period.
13.60 If the employee is a part-time employee, the notional earnings base in relation to the contribution period will be the amount worked out using the formula:
(Number of hours employed / Full-time employee hours) / Adjustment earnings
where:
[Clause 89; New subsection 25A(3)]
13.61 A part-time employee is defined in subsection 6(1) of the SGAA to mean a person who is not employed for more than 30 hours a week.
13.62 An equivalent full-time employee for the purpose of working out the factor Full-time employee's hours is an employee employed in exactly the same circumstances as the relevant part-time employee except that he or she is employed on a full-time basis. Therefore, if a part-time employee commences employment part way through a contribution period, for example, the factor Full-time employee's hours would be the number of ordinary hours of work for which a full-time employee would be employed in the period under the award assuming that he or she commenced employment at the same time as the part-time employee.
13.63 Similarly, the adjustment earnings for the period will be the adjustment earnings for a full-time employee for the period of actual employment.
13.64 If the adjustment earnings of a full time employee is $15 000 for a class 3 engine driver who works full time (528 hours in the July to September 1993 quarter), then a part time employee under the award who works a 3 day week (320 hours in the July to September 1993 quarter) would have a notional earnings base of:
(320 / 528) * $15 000 = $9 090.90
13.65 If that part-time employee had commenced employment on 1 September 1993, the number of hours employed by that part-time employee would be 112 hours. The adjustment earnings of a full time employee for the period 1 September 1993 to 30 September 1993 is $5 000. The equivalent number of hours worked by a full-time employee would be 176 hours. Therefore, the employee would have a notional earnings base of:
(112 / 176) * $5 000 = $3 181.81
Retirement of employee due to permanent incapacity or invalidity
13.66 The definition of permanent incapacity or invalidity in the SGAA is to be made consistent with the definition of permanent incapacity or invalidity in other taxation and occupational superannuation legislation.
13.67 The Commissioner of Taxation will be able to pay the shortfall component directly to a person who has retired due to incapacity or invalidity only if the person has given written notice of his or her retirement to the Commissioner together with a copy of a certificate signed by 2 registered medical practitioners certifying that the person is unlikely to be able to work again in a capacity for which he or she is reasonably qualified by education, training or experience [Clause 90].
13.68 1 July 1993
Background to the legislation
13.69 If a person under the age of 55 has been forced to retire from work because of illness, section 66 of the SGAA requires the Commissioner to pay the shortfall component directly to that person. To claim the direct payment the retired person must return the voucher he or she receives from the ATO to the issuing ATO Branch along with:
- •
- a notice in writing, signed by the retiree which advises that he or she has actually retired, and
- •
- a copy of the certificate signed by the two registered medical practitioners.
13.70 The word illness for the purposes of section 66 has not been defined in the SGAA but should be consistent with existing taxation and occupational superannuation legislation.
Explanation of the amendment
13.71 The Commissioner will be able to pay the shortfall component directly to a person who has retired due to incapacity or invalidity only if the person has given written notice of his or her retirement to the Commissioner together with a copy of a certificate signed by 2 registered medical practitioners certifying that the person is unlikely to be able to work again in a capacity for which he or she is reasonably qualified by education, training or experience [Clause 91; New section 66] .