Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Hon Peter Costello, MP)Chapter 7 - Amendments of the Superannuation Guarantee (Administration) Act 1992
Overview
7.1 The amendments contained in Schedule 3 of the Bill will ensure that the earnings base specified in the Aberfoyle Limited (Superannuation) Award is a valid notional earnings base for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA). The amendments also make some minor technical changes to section 23 of the SGAA.
Summary of the amendments
7.2 The amendments make the earnings base specified in the Aberfoyle Limited (Superannuation) Award a valid notional earnings base for the purpose of calculating the superannuation guarantee charge liability of employers who contribute to the Aberfoyle Award Superannuation Fund. The amendments will also make minor technical amendments to subsections 23(4B) and 23(4C) to ensure that employers using subsection 23(4B) to calculate the reduction of their superannuation guarantee charge liability can reduce this liability to the extent which was intended.
7.3 The amendments relating to the Aberfoyle Superannuation Award Fund will apply for the 1995-96 financial year and all previous years where the SGAA was in force (ie. back to the 1992-93 financial year). It will have no effect after the 1995-96 financial year. [Subitem 9(1)]
7.4 The minor technical amendments to subsections 23(4B) and 23(4C) will apply to assessments of superannuation guarantee shortfall for the year beginning on 1 July 1994 and for all later years. [Subitem 9(2)]
Background to the legislation
7.5 The SGAA potentially imposes a liability (the superannuation guarantee charge or SGC) on all employers. Under the SGAA, if an employer does not make a minimum level of superannuation contributions into a complying superannuation fund on behalf of non-exempt employees, the employer has a superannuation guarantee shortfall and is required to pay the SGC.
7.6 In order to determine if an employer has a superannuation guarantee shortfall in respect of an employee, it is necessary to determine:
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- the percentage level of superannuation support the employer is expected to provide for the employee (the charge percentage which is specified in sections 20 and 21 of the SGAA); and
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- the percentage level of superannuation support actually provided for the employee (calculated in accordance with sections 22 and 23 of the SGAA).
7.7 If the actual percentage level of superannuation support is less than the legislated level of support a shortfall will arise. If the actual level of support is equal to or exceeds the legislated level then the charge percentage is reduced to zero and no shortfall arises.
7.8 In broad terms, the charge percentage is reduced by an amount equal to the employer's contributions to the fund as a proportion of the employee's notional earnings base.
What is a notional earnings base?
7.9 The notional earnings base of an employee depends on the circumstances surrounding the making of a contribution on the employee's behalf. For example, where an employer was contributing to a fund under an industrial award immediately prior to 21 August 1991 that specifies the contributions to be made by reference to the earnings of a member of a class of employees, the notional earnings base is the amount of those earnings (paragraph 13(5)(a) of the SGAA). In other cases, the notional earnings base may be the actual earnings or ordinary time earnings of the employee (paragraph 13(5)(b) and subsection 14(3) of the SGAA).
7.10 For contributions made under 'flat dollar' schemes (where a specified dollar amount is required to be contributed in respect of employees), the earnings by reference to which the contributions are tied only qualify as a notional earnings base under the SGAA in certain circumstances. For example, the amount of the required contribution must be adjusted by reference to any increase in the earnings of a class of employees, and the award containing this requirement must have been in place before 21 August 1991.
Reason for the amendment in relation to the Aberfoyle Award Superannuation Fund
7.11 The Aberfoyle Limited (Superannuation) Award is a flat dollar scheme, but the earnings base specified in the Award does not qualify as a notional earnings base under the SGAA. The adjustment provision required in flat dollar schemes was inserted into the Award after 21 August 1991 and referred to the average earnings of a range of employees and not to the earnings of a class of employees. Accordingly, employers contributing under that Award would be required to calculate their potential liability to pay the super guarantee charge by reference to each employee's ordinary time earnings.
7.12 Subsections 23(4A), (4B) and (4C) were inserted into the SGAA by Act No. 169 of 1995. These subsections commenced on 16 December 1995 (which was the date of Royal Assent for the Taxation Laws Amendment Bill (No. 2) 1995) and applied in relation to assessments of superannuation guarantee shortfall for the year beginning on 1 July 1994 and for all later years.
7.13 The provisions have a minor technical deficiency. The deficiency arises due to an employee's notional earnings base not being apportioned where the employee's employer contributes for the benefit of the employee for only a portion of a particular contribution period (eg. where the employee is employed for only a portion of the contribution period). In such cases, even if the employer contributed the legislated amount in respect of that employee, they could incur a superannuation guarantee charge liability because their contribution would be measured over the whole contribution period.
Explanation of the amendments
7.14 Schedule 3 of the Bill recognises the notional earnings base used in the Aberfoyle Limited (Superannuation) Award as a valid notional earnings base for the purposes of the SGAA. It does this by providing that where an employer is contributing for the benefit of an employee into the Aberfoyle Award Superannuation Fund, then the notional earnings base is the amount that is specified as the earnings base in the Aberfoyle Limited (Superannuation) Award 1987. [Items 1 and 2 - new paragraph 13(5)(ab) and new section 13B]
7.15 New subsections 23(4D), (4E) and (4F) will ensure that where an employer contributes to the Aberfoyle Award Superannuation Fund the employer's charge percentage is reduced by an amount in accordance with the formula in new subsection 23(4E) . [Item 7]
7.16 The formula in new subsection 23(4E) is in two parts. The first part focuses on the rate of contributions, as a proportion of the employee's notional earnings base, during the period within the contribution period in which the employer is making those contributions. For example, if the employer contributes for the benefit of the employee for only a part of the contribution period, then the first part of the formula will reflect this by reducing the denominator by the proportion of the period for which contributions were made over the whole contribution period. This is achieved by multiplying the notional earnings base by the 'contribution period factor.' Of course, if the employer contributes for the benefit of the employee for the whole of the contribution period, then the 'contribution period factor' will simply be '1'. [Item 7]
7.17 The second part of the formula is the 'employment factor.' This reduces the amount by which the charge percentage would otherwise be reduced, by reference to any period during the period of employment that contributions were not made on behalf of the employee.
7.18 In new subsection 23(4F) the notional earnings base is defined for both full-time employees and part-time employees. For full-time employees, it is simply the amount that is the earnings base for the purposes of the Aberfoyle Limited (Superannuation) Award 1987. For part-time employees, it is that amount multiplied by the number of hours the part-time employee was employed as a proportion of the hours that a full time employee would have worked if he or she were employed for the same period. This ensures that where a part-time employee is only employed for a part of a contribution period, his or her notional earnings base is calculated according to the hours actually worked compared with a full-time worker working for the same period.
7.19 Provided the percentage obtained by the calculation in new subsection 23(4E) is equal to or greater than the legislated level of superannuation support required by section 20 or 21 (depending on which is relevant), then the employer can reduce their liability to the SGC to zero.
7.20 A cross-referencing amendment is necessary to subsection 14(1A) to ensure that where an employer is contributing for the benefit of an employee to the Aberfoyle Award Superannuation Fund, then section 14 will not apply to determine the notional earnings base of the employee. [Item 3]
7.21 A further cross-referencing amendment is necessary to paragraph 23(5)(b) to ensure that if the reduction of the charge percentage can take place under new subsection 23(4D) then the employer does not need to calculate the reduction using an earnings base of ordinary time earnings. [Item 8]
7.22 The formula currently in subsection 23(4B) is replaced by a similar formula to that in new subsection 23(4E) . [Item 4]
7.23 The new formula is the same as the current formula except, as with new subsection 23(4E) , it includes the 'contribution period factor' to ensure that where an employee's employer contributes for the benefit of the employee for only a portion of the contribution period, the notional earnings base is appropriately adjusted. [Items 4 and 5]
7.24 In the absence of the insertion of the 'contribution period factor' into the formula, employers might not be able to reduce their superannuation guarantee charge liability to the extent which was intended. An example is where an employee was only employed for a part of a contribution period and during that time the employer made the correct contributions on the employee's behalf. The formula currently in subsection 23(4B) would result in the employer being able to only reduce their charge percentage by the percentage of what they have actually contributed as a proportion of the notional earnings base of the entire contribution period. That is, there is no facility currently in subsections 23(4B) or 23(4C) to enable the employer to apportion the notional earnings base so it relates to the period for which contributions are actually made. This deficiency is remedied by the insertion of the 'contribution period factor' in the formula.
7.25 A further minor technical amendment is necessary to the definition of 'Full-time employee's hours' in the definition of 'notional earnings base' of a part-time employee in subsection 23(4C). This amendment ensures that a part-time employee's notional earnings base is worked out according to the number of hours the part-time employee was employed as a proportion of the hours that a full time employee would have worked if they were employed for the same period. [Item 6]