Australia: Are you prepared for increases to superannuation guarantee contribution rates?

Annual increases to superannuation guarantee contribution rates start from 1 July 2013 when the rate rises to 9.25%, and will continue until 1 July 2019 when the rate will have risen to 12%.

Do employment contracts need to be reviewed as a result?

We first deal with legal obligations, and then likely employee expectations.

Employers must make the minimum compulsory contributions required by the Superannuation Guarantee (Administration) Act 1992, in order to avoid the superannuation guarantee charge, regardless of what is in their employees' contracts.

However, this does not mean that employers should ignore those terms and conditions.

• If terms say that employees are paid a salary plus the minimum superannuation guarantee contributions required to avoid the superannuation guarantee charge
  No amendments will be required to those clauses to reflect the increases. All employers need to do in this case is ensure that superannuation contributions are made at the correct rates. This will result in an increase in the employees' overall remuneration although the salary will remain the same.
• If your terms say that employees are paid salary plus 9% superannuation
  Employers must make contributions in line with the increases. This will result in an increase in the employees' overall remuneration although the salary will remain the same.

• A variation to existing employment contracts can be sought so that they no longer specify an incorrect superannuation rate. Instead, the variation could require contributions at the minimum level required to avoid the superannuation guarantee charge. This could be implemented with employee agreement, for example, at pay review time.

• If your terms say that employees are paid a fixed, Total Remuneration Package (TRP), inclusive of superannuation
  Under this kind of formulation, the employee's cash take home pay can, subject to the below, be lawfully reduced to absorb the increase to the superannuation guarantee contribution.

• However, this approach is likely to result in questions or complaints. Employers may wish to get on the front foot and have a communication strategy ready to manage that inevitable discussion.

  In addition, if the over-award/agreement buffer built into an employee's TRP has not been reviewed in some time, it would be a good idea to review that buffer before the reduction in take home pay is implemented to make sure that it does not result in payments that are below minimum wage requirements.

  If employers decide to maintain an employee's cash take home pay despite the fact that the TRP allows the increase to be absorbed, we strongly recommend varying employees' contracts to reflect the new pay structure. Remember that increases to the rates will be a regular feature for the next seven financial years, so any variation should take into account the ongoing changes. Given that the employee will benefit from this approach, obtaining their agreement to a variation should not be problematic.

Superannuation guarantee charge

Employers must meet the higher contribution rates from the September quarter 2013.

Employers that fail to meet contribution obligations must lodge a Superannuation Guarantee Charge Statement - quarterly with the Australian Taxation Office (ATO), and must pay the superannuation guarantee charge.

The charge consists of the shortfall in superannuation (which the ATO is then responsible for re-distributing to the relevant employees' funds), interest on the shortfall (10% per annum), and an administration fee ($20 per employee, per quarter). The charge is not tax deductible.

Depending on the circumstances, further penalties may also be imposed at the ATO's discretion. Importantly for company directors, personal liability now attaches to them as individuals for penalties equal to any unpaid amount.

Other considerations

If not already accounted for, the increases will need to be factored into your business' budgets going forward.

You should also keep them in mind during annual pay reviews, and when negotiating for any new enterprise agreements.

Employers should also be mindful of the concessional cap of $25,000 which from 1 July 2012 applied to all employees. The proposed concessional cap of $50,000 for employees aged over 50 with less than $500,000 in superannuation has been deferred until 1 July 2014.

If an employer is making contributions at the rate of 9% which they increase to 9.25% without regard for the maximum earnings base, (ie contribution in excess of the amount required to meet the obligations under the Superannuation Guarantee (Administration) Act 1992), an employee earning more than $270,300 per annum will exceed the concessional cap. Contributions made in excess of the concessional cap are subject to excess contributions tax, making them largely ineffective for taxation purposes. Some contracts and industrial agreements provide for contributions to be made without regard for the maximum earnings base. Employers should review their contracts and industrial agreements to ensure that they allow sufficient flexibility to deal with these changes and avoid employees facing unexpected tax liabilities.

Lastly, make sure that your payroll system or payroll provider is ready to handle the increase on 1 July.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.