Author: thriveadmin

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Background

On 24 May 2018, the Government announced a one-off, 12-month Superannuation Guarantee Amnesty (the Amnesty), and introduced legislation into Parliament, which allows non-complying employers to self-correct any unpaid superannuation guarantee (SG) amounts dating back to 1992. The amending legislation remains before the Senate, so the Amnesty does not yet have the force of law.

Note
For the sake of space and expression, the proposed Amnesty will be hereafter referred to as simply ‘the Amnesty’.

Even though the Amnesty is not yet law, a number of technical questions have arisen since the Amnesty was announced and the Bill was introduced into Parliament — this blog clarifies these issues.

Note
This blog will not repeat in detail the technical content of our previous discussion on the SG Amnesty. For an explanation of the workings of the SG Amnesty please see our previous blog posted on 13 June 2018.

Overview of current SGC components

Under s. 17 of the Superannuation Guarantee (Administration) Act 1992 (SGAA), if an employer has one or more individual SG shortfalls for a quarter, the employer is liable for the SG charge (SGC) comprising:

• the total of the employer’s individual SG shortfalls (based on total salaries and wages not ordinary times earnings) for the quarter;
• the nominal interest component for the quarter (imposed at the rate of 10 per cent calculated from the start of the quarter); and
• the administration component for the quarter (being $20 per employee per quarter).

The employer is also liable for:

• a Part 7 penalty for failing to lodge an SG statement, equal to double the amount of the SGC, i.e. 200 per cent of the SGC payable (the penalty may be partially remitted); and
• the general interest charge (GIC) on the unpaid amount.

Further, aside from the GIC, any amounts payable are non-deductible including the Part 7 penalty.

Questions on the SG Amnesty

For how long is the Amnesty available?

Subject to the passage of legislation, the Amnesty will be available from 24 May 2018 to 23 May 2019.

What period is covered by the Amnesty?

The Amnesty applies to previously undeclared SG shortfalls for any quarter from 1 July 1992 to 31 March 2018. The Amnesty does not apply to the quarter starting on 1 April 2018 or subsequent quarters.

What concessional treatment does an employer receive if they make a disclosure to the ATO under the Amnesty?

Employers who voluntarily disclose previously undeclared SG shortfalls during the Amnesty period and before the commencement of an audit of their SG will:

• not be liable for the administration component and penalties that may otherwise apply to late SG payments; and
• be able to claim a deduction for catch-up payments made in the Amnesty period.

Employers will still be required to pay all employee entitlements, including:

• the unpaid SG amounts owed to employees;
• the nominal interest; and
• any associated GIC.

What happens if an employer makes a disclosure to the ATO while the Amnesty does not yet have the force of law?

If the legislation is enacted

If the legislation is enacted, the Amnesty will apply retrospectively once enacted (i.e. from 24 May 2018), and the concessional treatment outlined above will be available to the employer if they disclose and pay during the period starting 24 May 2018 and ending on 23 May 2019.

In the meantime …

The deductibility and removal of the administration component proposed in the Amnesty depend on the passage of legislation. Until this occurs, the current law applies which means that:

the administration component of the SG charge remains legally payable; and

deductions cannot be claimed.

The ATO will not require payment of the administration component until the outcome of the legislation is known.

If the legislation is not enacted

If the legislation is not enacted, and an employer has made a disclosure to the ATO on or after 24 May 2018:

any self-assessments that anticipated the new law will need to be amended to include the administration component (employers will be required to pay the administration component);

any contributions and payments made under the Amnesty will not be tax-deductible; and

Part 7 penalties will be imposed but may be remitted by the ATO.

Employers will not be able to receive a refund for payments made under the Amnesty if the law does not pass, as these amounts were always payable under the existing law.

What happens if the employee is now 75 or over or 65–74, and doesn’t pass the work test?

Consider the situation where the employee was less than 65 years, or was 65–74 and passed the work test (set out in item 2 of the table in Reg. 7.04(1) of the SIS Regs) in the income year that the employer should have correctly paid the SG contributions, but is now 75 or more, or is 65–74 and does not satisfy the work test, in the 2018–19 income year, when the employer makes an Amnesty payment. The individual may or may not still be employed by the employer. This could affect whether the superannuation fund is able to accept the contribution.

The amending Bill does not contain any amendments to the characterisation or treatment of payments made under the Amnesty; they are payments of SGC (if paid to the Commissioner) or contributions to a complying superannuation fund (if paid directly to the fund). Both of these options will meet the definition of mandated employer contributions for the purposes of a fund’s ability to accept contributions for a member aged 75 or more, or 65–74 where the work test is not satisfied.

Regulation 5.01 of the SIS Regs defines mandated employer contributions to relevantly include contributions made by an employer that:

1. reduce the employer’s potential liability for SGC;
2. are payments of shortfall components.

Where an employer makes a payment under the Amnesty:

• directly to a superannuation fund — they are making contributions and claiming the late payment offset under s. 23A of the SGAA. The contributions reduce their ‘potential liability for SGC’ and fall within the first point above; and
• to the ATO — these are ‘payments of shortfall components’ under Part 8 of the SGAA and fall within the second point above.

In other words, Amnesty payments are mandated employer contributions so the age of the employee or their circumstances will not prevent the superannuation fund from accepting Amnesty payments.

Note
Where an employer has made a payment to the ATO under the Amnesty and the employee is over 65, the employee can request the ATO pay these amounts directly to them under s. 65A of the SGAA. If this occurs, the ATO will manage the payment in line with other ATO-held superannuation, which can be applied for via myGov or downloadable forms.

What happens if the employee is now a non-resident?

Consider the situation where the employee is a non-resident for tax purposes in the 2018–19 income year, when employer makes an Amnesty payment. It is assumed in this discussion that the individual is no longer employed by the employer. This will affect how the ATO manages the Amnesty payment.

If the employee was originally a non-resident

As mentioned above, the Bill does not amend the characterisation of the Amnesty payment.

If the employee was a former temporary resident, the Amnesty amount paid to the ATO is treated as though it were paid as unclaimed money under s. 65AA of the SGAA. In this case, the ATO can pay this amount directly to the employee as a departing Australia superannuation payment (DASP). For more information on DASPs, see the ATO’s fact sheet (QC 24169).

If the employee was originally a resident

If the employee was not a former temporary resident, the ATO will need to pay the amount to a complying superannuation fund for the employee, or to the Superannuation Holding Accounts Special Account (SHASA) if the ATO cannot identify a fund for the employee. If the amount is paid into the SHASA, the employee will only be able to request direct payment of the amount in certain circumstances including if the employee is over 55.

The ATO will take steps to identify a superannuation fund for the employee, or information for direct payment where appropriate. The employee may provide information to facilitate this process.

Note
Amnesty payments made to the ATO will be deductible to the employer (provided they are made in the Amnesty period) irrespective of whatever ultimately happens to the amounts once they reach the ATO.

What happens if the employee is now deceased?

Consider the situation where the employee was alive in the income year that the employer should have correctly paid the SG contributions but is now deceased by the 2018–19 income year, when employer makes an Amnesty payment. This will affect how the ATO manages the Amnesty payment.

Notwithstanding that the employee is now deceased, the employer remains liable for the SGC for a shortfall that relates to a deceased employee (see ATO ID 2014/31). This is because s. 15B of the SGAA (from 1 January 2006) extends the application of s. 19 of the SGAA to treat former employees as employees. The SGAA does not define former employee so the term takes its ordinary meaning. It is therefore possible for a deceased employee to meet the common law meaning of former employee.

Further, the death of an employee subsequent to when the original SG shortfall arose doesn’t prevent the employer from being eligible for the Amnesty in respect of that employee.

Where an employer pays the SGC to the ATO, and the relevant employee is deceased, the ATO pays the money directly to the employee’s legal personal representative (LPR) in accordance with s. 67 of the SGAA. Accordingly, where an employer makes an Amnesty payment to the ATO in respect of a now deceased employee, the ATO will pay the amount directly to the employee’s LPR.

Note
Under s. 23(9A) of the SGAA, a contribution made to the LPR of a deceased employee is taken to have been a contribution made by the employer to a complying superannuation fund for the benefit of the employee.

Reopening the estate — How is the Amnesty payment managed by the LPR?

Generally, once a deceased estate has been fully administered and closed, it stays that way. However, there are times when an estate must be reopened, such as when more assets are discovered. This is one of those situations … even if the deceased estate was fully administered many years before the Amnesty payment is received by the LPR. No time limits apply on reopening a deceased estate.

Once the LPR receives the Amnesty payment from the ATO, the LPR will need to refer to the Will of the deceased to determine who is entitled to the amount.

Any binding death benefit nomination (BDBN) made by the deceased will be irrelevant because a BDBN constitutes instructions to the trustee of a superannuation fund as to where the death benefits should be paid by the trustee of the fund. In this case, the Amnesty payment bypasses the superannuation fund and is paid directly to the LPR.

What is the tax treatment of the payment to the LPR?

An amount paid to the LPR of the deceased under s. 67 of the SGAA is a superannuation death benefit (item 7 of the table in s. 307-5 of the ITAA 1997), even though it is paid directly to the LPR and not the superannuation fund.

Section 302-10 of the ITAA 1997 sets out the treatment of the superannuation death benefit that the LPR receives in their capacity as LPR.

The detailed tax treatment of superannuation death benefits is beyond the scope of this blog.

Important

The definition of a death benefits dependant is set out in s. 302-195(1) of the ITAA 1997 and means:

1. the deceased person’s spouse or former spouse; or
2. the deceased person’s child aged less than 18; or
3. any other person with whom the deceased person had an interdependency relationship under s. 302-200 just before they died; or
4. any other person who was a dependant of the deceased person just before they died.

The Commissioner notes in TD 2013/12 that paras. (c) and (d) above require the relationship to which they refer to exist just before the deceased person died. However, paras. (a) and (b) do not refer to the time as at which a person’s satisfaction of either of those paragraphs is tested.

Clarification of this issue is important because an employer may make an Amnesty payment to the ATO which is then paid to the LPR, and the LPR will need to determine whether the payment is tax-free (if it is taken to be made in respect of a beneficiary who is a death benefits dependant) or taxable (if it is taken to be made in respect of a beneficiary who is not a death benefits dependant). A beneficiary may have been a death benefits dependant at the time of death (e.g. because they were 16 years of age) but is no longer a death benefits dependant by the time the LPR receives the Amnesty payment from the ATO (e.g. because they are now 21 years of age).

The Commissioner’s position (at para. 5 of TD 2013/12) is that:

… on the basis that the definition of a ‘death benefits dependant’ relates to ‘a person who has died’, the relevant time as at which a person’s satisfaction of either of paras. (a) or (b) of that definition is to be tested is logically related to the time the deceased person died.

This means that the time at which the LPR determines whether or not the beneficiary is a death benefits dependant (which will determine the tax treatment of the payment) is just before the deceased person died not at the time of the Amnesty payment.

What if the employee’s LPR is now deceased?

The ATO will generally pay the amount to the LPR of the LPR. However, in Victoria, this is only in the case of executors (see s. 17 of the Administration and Probate Act 1958 (Vic)), i.e. executor of executor, not executor of administrator or vice versa. Further, this is only in the case of the death of a sole executor.

This is also subject to the terms of the Will (i.e. does the Will set out who will act if the executor dies), and you should refer to the state legislation applicable in your jurisdiction.

Are Amnesty payments subject to payroll tax and WorkCover?

The definitive answer to this question will depend on, and vary with, State and Territory legislation. However, it is likely that Amnesty payments will constitute ‘taxable wages’ for payroll tax and WorkCover purposes. There appear to be no provisions in the relevant legislation which contemplate a federal amnesty nor treat an Amnesty payment paid in 2018–19 as not forming part of this year’s wages for payroll tax and WorkCover purposes.

The correct payment of SG contributions at the time may not have caused the employer to exceed the payroll tax threshold in earlier income years, however a large one-off Amnesty payment could cause an employer to exceed the relevant payroll tax threshold in 2018–19 which would otherwise not have been exceeded.

Can I make the Amnesty payment directly to the superannuation fund or does it have to go to the ATO?

An employer can either pay the SGC to the ATO or make an offsetting contribution directly to a superannuation fund under s. 23A of the SGAA.

The ATO advises (QC 55626) that where an employer can pay the full SG shortfall amount for a period they should pay the amount directly to the employee’s superannuation fund, but where the employer is not able to pay the full SG shortfall amount for a period they should pay the ATO.

The ATO provides the following guidance:

Pay direct to the super funds

If you are able to pay the full SG shortfall amount for each period (including nominal interest) to an employee super fund (or funds), and have not previously been assessed for SGC, you need to:

• pay the relevant amounts directly to the relevant employee super fund (or funds), and
• inform us by completing and lodging the SG Amnesty Fund payment form (which includes an election to have those contributions offset against the SGC liability).

You should lodge this form with us on the same day you pay the relevant super fund.

Paying directly to the employee super fund (or funds) is the simplest way to pay your outstanding SG shortfall amount and you will not have to pay any GIC.

Paying directly to super funds is not available for periods where you have previously been assessed for SGC — in these cases, any outstanding SGC amounts must be paid to the ATO.

Pay the ATO

If you cannot pay the full SG shortfall amount for each period to a super fund (or funds), you need to:

• complete the SG Amnesty ATO payment form, and
• pay the amount owing to us.

If you have difficulties paying the full amount, you can set up a payment plan with us to pay the amount owing over an agreed period.

I am a closely held employer. Can I use the Amnesty for myself?

Nothing in the Bill proposes to limit the availability of the Amnesty to employers who have only arm’s length employees. Accordingly, a closely held employer may have paid salary or wages, or directors’ fees to the business owner but never paid, or not paid all of the requisite, SG contributions.

Provided there is written evidence of a genuine salary/wage or director’s fee, the employer could (and should) make an Amnesty payment that is fully deductible, is excluded from the owner’s Div 293 income and won’t cause the owner to exceed their concessional contributions cap (see below).

What happens if I exceed my concessional contributions cap because of an Amnesty payment?

Where an employee exceeds the concessional contributions cap because of an Amnesty payment, the Commissioner can exercise his discretion to disregard the contributions made under the Amnesty.

Important

Where an employer pays the SGC to the ATO, the employee will not need to apply for the Commissioner’s discretion. However, where an employer pays the SGC directly to an employee’s superannuation fund, the employee will need to inform the ATO of the payment by applying for the Commissioner’s discretion under s. 292-465 of the ITAA 1997.

I can deal with an SGC issue by not claiming a tax deduction for a late SG payment, can’t I?

The SGAA provides that an employer reduces their SGC liability by:

1. paying correct SG contributions into a complying fund by the 28^th day following the end of a quarter (and if they don’t they are liable for the SGC); or
2. electing to treat a late payment to a superannuation fund as an offsetting contribution under s. 23A of the SGAA.

Both options require the employer to advise the ATO by lodging an SG statement and result in the payment (together with the relevant components and penalties) being non-deductible.

Nothing in the SG legislation allows an employer to deal with an SG shortfall by choosing not to claim a tax deduction for a late payment in the tax return. Not claiming a tax deduction for the late payment does not relieve the employer of their SGC liability.

What happens if I don’t come forward during the Amnesty?

Employers who are not up-to-date with their SG payment obligations to their employees and who don’t come forward during the Amnesty may face higher penalties in the future.

The ATO has advised that, generally, a minimum penalty of 50 per cent of the SGC will be applied to employers who could have come forward during the Amnesty but did not (although the particular circumstances of each case will be considered by the ATO).

Remember that it is proposed that extensive payroll reporting through Single Touch Payroll commences for small employers (19 or fewer employees as at 1 April 2018) from 1 July 2019. This will allow the ATO even greater transparency over employers’ payroll obligations …

… so now is the time to get your house in order.

Schedule 2 to the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 proposes to amend the Superannuation Guarantee (Administration) Act 1992 (SGAA) to allow individuals to avoid unintentionally breaching their concessional contributions cap (CC cap) when they receive superannuation guarantee (SG) contributions from multiple employers.

Under the current law, an employer will have an individual SG shortfall for an employee for a quarter making them liable for the SG charge (SGC) (significant penalties also apply, and the SGC and penalties are non-deductible) if they do not contribute 9.5 per cent of the employee’s ordinary time earnings (OTE) into a complying fund within 28 days of the end of that quarter. The amount of superannuation support is capped at the maximum contribution base (MCB) which acts as a limit beyond which an employer no longer needs to make SG contributions for an employee for a quarter to avoid liability for the SGC. The MCB for the 2018–19 income year is $54,030 of earnings per quarter.

Where an employee has one employer, the maximum SG contributions that would be required to be made for a whole income year — calculated as 9.5 per cent of the maximum contribution base — is $20,531.40. This is within the employee’s CC cap of $25,000.

But where the employee has two separate employers, each employer is required to make mandatory SG contributions for the employee otherwise they will have an SG shortfall and be liable for the SGC. Assuming that the employee’s OTE for each employer is more than $216,120 (i.e. $54,030 × 4 quarters), each employer makes SG contributions limited by the MCB, this would result in the employee exceeding their CC cap by $16,062.80 (i.e. ($216,120 × 9.5% × 2) – $25,000)).

Until now, the employee has not been able to avoid inadvertently breaching their CC cap when they receive SG contributions from multiple employers, and they have been subject to excess contributions tax. The excess concessional contribution is included in their income tax return and taxed at their marginal tax rate. They can choose to withdraw some of the excess contributions from the superannuation fund to pay the additional tax.

Proposed new measure to avoid inadvertent cap breaches

Under the new measure, which was announced as part of the 2018–19 Federal Budget on 8 May 2018, instead of receiving SG contributions which may cause an employee in this circumstance to exceed their CC cap, they may apply to the Commissioner to ‘opt out’ of the SG regime in respect of an employer and negotiate with the employer to receive additional cash or non-cash remuneration.

This will effectively apply to employees whose employment income exceeds $263,157 (calculated as $25,000 divided by 9.5 per cent), although this threshold is not expressly stipulated in the proposed legislative provisions.

The measure is proposed to commence to quarters starting on or after 1 July 2018.

How will the employee ‘opt out’ of the SG regime?
An employee with multiple employers who seeks to ‘opt out’ of the SG regime will need to apply to the Commissioner for an employer shortfall exemption certificate (‘certificate’).

What is the effect of a certificate?

An employer that is covered by a certificate issued by the Commissioner will not be liable for the SGC (or face other consequences under the SGAA) if they do not make SG contributions on behalf of their employee for a quarter covered by a certificate. This is achieved by reducing the employer’s MCB to nil for that employee for that quarter.

The certificate does not prevent an employer from making SG contributions on behalf of the employee, and an employer may choose to disregard a certificate and continue to make contributions for one or more quarters. This may occur where:

• the employer and the employee do not agree on the terms of an alternative remuneration package; or
• the employer has insufficient time to adjust their payroll or other business software to discontinue making SG contributions for the employee.

The effect of the certificate is only to remove the consequences of failing to make any SG contributions for the quarter covered by the certificate.

Once the certificate has been issued, the Commissioner may not vary or revoke the certificate.

However, this does not preclude an employer and employee agreeing that the employer will recommence making SG contributions for the employee at any point during the quarter covered by a certificate. This would be relevant where the employee’s circumstances change and they no longer expect to exceed their CC cap; for example, where they no longer have multiple employers, or they reduce their work hours which decreases their earnings and therefore their SG contributions.

Issuing a certificate

What conditions need to be satisfied to issue a certificate?

The Commissioner may issue a certificate in relation to an employee who has applied to the Commissioner (in the approved form) and their employer for a quarter if all of the following three conditions are satisfied:

Applying for a certificate

The application for a certificate:

• can only be made by the employee — the Commissioner cannot issue a certificate at the request of an employer or on the Commissioner’s own initiative; and
• must be made with the Commissioner in the approved form.

Can an employee apply for a certificate for the whole income year?

An issued certificate applies to an employer for a quarter. To minimise administrative costs:

• multiple certificates — an employee can request, through a single application, separate certificates for each employer and quarter in relation to which they are seeking a certificate — a separate certificate will be issued for each employer and quarter; and
• multiple quarters — the Commissioner may combine one or more certificates covering the same employer and employee, such that a single certificate covers multiple quarters in a financial year.

Note, however, given that a certificate is applied for before the start of a quarter, while it is possible to apply for a certificate for more than one quarter in a single application, the employee may not have a clear picture of their annual position (i.e. whether they are likely to exceed their CC cap for the financial year) before the start, or in the early months, of an income year.

Due date to apply for a certificate

The due date for lodging an application for a certificate is 60 days before the first day of the quarter to which the application relates. However, the Commissioner has a discretion to defer the due date for lodging the application.

The Explanatory Memorandum (at para. 2.48) to the Bill states that:

It is expected that for the first quarter of the 2018–19 financial year, the Commissioner will defer the due date for all applications to allow employees time to apply for an exemption following the commencement of these amendments.

Note

The Bill did not clear Parliament before the Senate adjourned on 28 June 2018, and the Parliament is in recess until Monday 13 August 2018. The Bill also contains measures to give effect to the SG Amnesty announced on 24 May 2018, and this may delay passage of the Bill. The measure is proposed to commence to quarters starting on or after 1 July 2018, so the ATO will need to provide guidance on how they will administer applications made that relate to the first, and possibly second, quarters of the 2018–19 financial year.

Examples

Example 1 — two employers

Michael is employed by Employer A on a $200,000 salary, and by Employer B on a $300,000 salary. Assume for simplicity that the SG contributions paid by the employers are in addition to these salaries.

Current law

SG contributions would be as follows:

Employer A — $19,000

Employer B (based on MCB of $54,030 = $5,132.85 × 4 quarters) — $20,531.40

Total concessional contributions = $39,531.40, which exceeds the CC cap of $25,000.

Proposed law

Michael can apply for a certificate and provide it to Employer B to reduce Employer B’s MCB to nil and ensure they don’t have an SGC liability if they don’t make any SG contributions for Michael’s benefit.

Michael still has at least one employer, Employer A, that is required to make SG contributions for Michael’s benefit in order to avoid an SGC liability. It doesn’t matter that only $19,000 of concessional contributions are being paid into Michael’s superannuation fund; he is still receiving a minimum level of SG contributions for the financial year.

If Michael wants to maximise his superannuation contributions, notwithstanding that Employer B has a certificate that covers Michael, Michael could choose to:

• arrange with either Employer A or Employer B to pay an additional contribution of $6,000;
• contribute $6,000 directly and claim a deduction for the personal contribution in his tax return.

Note

The certificate doesn’t reduce the contribution that Employer B pays to an amount that ensures Michael gets exactly $25,000 in his fund — that would be unworkable. Employer B’s MCB is reduced to nil, so long as Michael has another employer, which he does when would have an SG shortfall if the SG contributions were not paid.

Example 2 — three employers

Michael is employed by Employer A on a $200,000 salary, by Employer B on a $300,000 salary, and Employer C on a $100,000 salary. Assume for simplicity that the SG contributions paid by the employers are in addition to these salaries.

Current law

SG contributions would be as follows:

Employer A — $19,000

Employer B (based on MCB of $54,030 = $5,132.85 × 4 quarters) — $20,531.40

Employer C — $9,500

Total concessional contributions = $49,031.40, which exceeds the CC cap of $25,000.

Proposed law

In a single application, Michael can apply for two certificates and provide them to Employer B and Employer C to reduce their MCB to nil and ensure they don’t have an SGC liability if they don’t make any SG contributions for Michael’s benefit.

Michael still has at least one employer, Employer A, that is required to make SG contributions for Michael’s benefit in order to avoid an SGC liability. It doesn’t matter that only $19,000 of concessional contributions are being paid into Michael’s superannuation fund; he is still receiving a minimum level of SG contributions for the financial year.

If Michael wants to maximise his superannuation contributions, notwithstanding that Employer B and Employer C each have a certificate that covers Michael, Michael could choose to:

• arrange with Employer A, Employer B or Employer C to pay an additional contribution of $6,000;
• contribute $6,000 directly and claim a deduction for the personal contribution in his tax return.

Note

It is unlikely that the Commissioner would issue a certificate for Employer A and Employer B, such that Michael is receiving superannuation support from only Employer C, because this would result in Michael having only $9,500 of SG contributions made for his benefit.

The Commissioner can deny an application for a certificate if it would reduce Michael’s SG contributions by a substantially larger amount than is necessary. This is likely to be the case where he has two other employers who could make a more substantial contribution for his benefit. Accordingly, it is more likely that the Commissioner would issue a certificate for either Employers B and C, or Employers A and C, but not for Employers A and B.

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On 24 May 2018, the Government announced a one-off, 12-month amnesty (the Amnesty), and introduced legislation into Parliament, which allows non-complying employers to self-correct any unpaid superannuation guarantee (SG) amounts dating back to 1992. This article explains the Government’s latest attempt to tackle the SG gap problem.

Why is there a need for the Amnesty?

The announcement of the Amnesty by the Minister for Revenue and Financial Services, Kelly O’Dwyer, which is proposed to have immediate effect from 24 May 2018, caught the community by surprise. According to the media release, the ATO estimates that in 2014–15, around $2.85 billion in SG payments went unpaid. Of concern is that this estimate pertains to just one income year.

The Minister explains that:

[the Government is] introducing this one-off Amnesty to allow employers to wipe the slate clean and pay their workers what they’re owed. All Australian workers should be paid the entitlements they are owed.

The Amnesty is the latest announced measure in a suite of proposed reforms to protect SG entitlements by:

• giving the ATO the ability to seek court-ordered penalties for employers who continue to ignore their obligations;
• requiring APRA-regulated superannuation funds to report contributions more frequently to the ATO;
• implementing real-time reporting of payroll and superannuation information through Single Touch Payroll; and
• improving the effectiveness of the ATO’s various recovery powers, including director penalty notices.

While the Amnesty was not anticipated and is indeed generous, practitioners would be familiar with the ATO’s use of amnesties in recent years, mostly in relation to undisclosed foreign income. Such amnesties may appear ‘unfair’ from the perspective of those who fully comply with the law. Perpetrators who previously have not made any effort, and possibly have no intention, to right their wrongs are perceived as ‘getting away’ with their wrongdoings, while those who made voluntary disclosures to the ATO and corrected their wrongs before the Amnesty was announced will receive no reprieve.

How does the Amnesty work?

When is the Amnesty effective?

The Amnesty will last for 12 months, commencing on Thursday 24 May 2018 and ending on Thursday 23 May 2019.

The Amnesty applies only to disclosures of previously undeclared SG shortfall amounts that are made during the 12-month amnesty period and the disclosures relate to the quarters starting when the SG regime commenced and all subsequent quarters until and including the quarter starting on 1 January 2018 — that is, the period from 1 July 1992 to 31 March 2018. This is an astonishing 26 years.

The benefits of the Amnesty will not be available for SG non-compliance that occurs on or after 1 April 2018.

When is an employer eligible for the Amnesty?

To be eligible for the Amnesty, an employer must:

• voluntarily disclose SG shortfall amounts, relating to any period from 1 July 1992 to 31 March 2018, within the Amnesty period (24 May 2018 to 23 May 2019);
• disclose SG shortfall amounts that have not previously been disclosed;
• make the payment of the SG shortfall amount during the 12-month Amnesty period; and
• not have been previously informed that the ATO is examining (or that it intends to examine) the employer’s SG compliance for the relevant quarter.

According to the Explanatory Memorandum (EM) to the Bill, an ‘examination’ of an entity’s affairs includes reviews, audits, verification checks, record-keeping reviews/audits and other similar activities.

An employer may still qualify for the Amnesty if it has previously made disclosures about an SG shortfall for a quarter but comes forward with information about additional amounts of SG shortfall for that quarter.

What are the benefits to the employer?

Overview of current SGC components

Under s. 17 of the Superannuation Guarantee (Administration) Act 1992, if an employer has one or more individual SG shortfalls for a quarter, the employer is liable for the SG charge (SGC) comprising:

• the total of the employer’s individual SG shortfalls for the quarter;
• the nominal interest component for the quarter (imposed at the rate of 10 per cent calculated from the start of the quarter); and
• the administration component for the quarter (being $20 per employee per quarter).

The employer is also liable for:

• a Part 7 penalty for failing to lodge an SG statement, equal to double the amount of the SGC, i.e. 200 per cent of the SGC payable (the penalty may be partially remitted); and
• the general interest charge (GIC) on the unpaid amount.

Further, aside from the GIC, any amounts payable are non-deductible including the Part 7 penalty.

Administration component will be waived

Where an employer makes a voluntary disclosure under the Amnesty, the administration component of $20 per employee per quarter will not be payable in respect of SG shortfalls for employees who are included in that disclosure.

Example 1.1 from the EM

An employer with 100 employees for a quarter covered by the Amnesty previously had individual SG shortfalls identified in respect of 40 of those employees for the quarter.

Prior to the Amnesty, the employer’s SG shortfall (calculated in respect of the 40 employees) included an administration component for each of those employees.

During the Amnesty, the employer discloses that they recently became aware of a small individual SG shortfall in respect of all 100 of their employees. For the original 40 employees, this amount was in addition to the individual SG shortfalls originally identified.

As this disclosure occurred under the Amnesty, the employer does not have an administration component included in their (increased) SG shortfall for the quarter. However, the employer still has an administration component in respect of the original 40 employees.

Part 7 penalty will not apply

The Part 7 penalty will not be applied to catch-up SG payments made during the Amnesty period.

Catch-up SG payments will be deductible

Catch-up SG payments made between 24 May 2018 and 23 May 2019 will be tax deductible, i.e. in the 2017–18 and/or the 2018–19 income years. This includes payments made to the ATO in the form of the SGC, as well as contributions made directly to their employees’ superannuation funds that an employer has elected to offset against the SGC under s. 23A of the Superannuation Guarantee (Administration) Act 1992.

If the employer enters into a payment plan with the ATO (see below) that extends past 23 May 2019, any payments made after that date will not be deductible.

What must an employer do?

An employer must disclose to the Commissioner information related to an SG shortfall for the relevant quarter(s) and pay the outstanding SG amounts.

Calculating the amount payable

The employer must pay the SG shortfall plus the nominal interest component from the start of the relevant period to the date on which the SGC is payable. This ATO calculator may assist.

Further, the ATO will still impose GIC that accrues on the SG shortfall.

Paying the outstanding amount

The employer can ‘make good’ the SG shortfall by making a payment or a contribution:

• the employer can pay the SG shortfall, the nominal interest and the GIC directly to the ATO — this is termed a payment; or
• the employer can pay the SG shortfall, the nominal interest and the GIC directly to the employee’s superannuation fund as an offsetting contribution (see below) — this is termed a contribution.

There are two options for paying the outstanding SG amount and lodging the information with the ATO.

If the employer is able to pay directly to the superannuation fund(s)

Where the employer can pay the full SG shortfall amount directly to the affected employees’ superannuation fund(s), the employer needs to complete the SG Amnesty fund payment form and submit it to the ATO electronically through the Business Portal. The employer’s registered tax agent or BAS agent can also submit it via the Tax Agent Portal or BAS Agent Portal.

The employer must pay the full SG shortfall amount — including the nominal interest component — directly to the superannuation fund(s) on the same day that the form is lodged.

This option would be suitable in circumstances where the SG shortfall relates to current or recent employees and the employer is able to confirm that the superannuation account information in their records is up to date.

Further, this method is permitted only in relation to periods for which the employer had not previously been assessed for the SGC.

If the employer cannot pay directly to the superannuation fund(s)

Where the employer is unable to pay the full SG shortfall amount directly to the affected employees’ superannuation fund(s), it needs to lodge the SG Amnesty ATO payment form with the ATO. The form can be submitted electronically through the Business Portal. Alternatively, the employer’s registered tax agent or BAS agent can submit it via the Tax Agent Portal or BAS Agent Portal.

In this case, payment is not made to any superannuation funds but to the ATO. The ATO will contact the employer to arrange a payment plan. The employer may start payment before the ATO makes contact in order to reduce the GIC.

This option would be suitable where the affected employees have since departed the organisation and the employer is unable to ascertain their current superannuation account details.

The employer must use this method in the following circumstances:

• where the employer cannot pay the full SG shortfall amount to the superannuation fund(s); and
• in relation to periods where the employer had already lodged an SG statement or received an SGC assessment.

Failure to pay

An employer may no longer qualify for the Amnesty if it:

• does not pay the SGC amount outstanding; and
• either:
  • does not enter into a payment plan; or
  • fails to comply with the terms of a payment plan that has been entered into.

If an employer is notified by the ATO that it is no longer eligible for the Amnesty, they may need to renegotiate the payment plan to remain eligible.

When an employer no longer qualifies for the Amnesty in respect of a period, the ATO will amend the SGC assessment for the period to include the administration component, and Part 7 penalties (at the rate of 200 per cent of the SGC amount) may apply. Future payments of the SG amounts will not be deductible.

Defaulting on a payment plan may also expose the employer to other debt recovery action.

How are employees affected?

The employees will receive the SG shortfall amount plus the nominal interest component.

Notably, employees will also receive the GIC that accrues on the SG shortfall amount.

If an employee exceeds their concessional contributions cap ($25,000 for 2017–18 and 2018–19) due to these contributions, the Commissioner may exercise his discretion to disregard the contributions made under the Amnesty:

• where the employer pays the SGC amount to the ATO — the employees will not need to apply for the discretion under s. 292-465 of the ITAA 1997 (as they ordinarily would); and
• where the employer pays the SGC amount directly to the superannuation fund — the employee will need to apply for the discretion under s. 292-465 of the ITAA 1997.

Contributions made under the Amnesty do not count towards the employee’s income or contributions for Div 293 purposes (which taxes the contribution at the rate of 30 per cent where the individual’s income for this purpose exceeds $250,000).

This ensures that an employee cannot exceed their concessional contributions cap or be liable for a Div 293 tax liability as a result of their employer making a payment or contribution under the Amnesty.

The future impact

The EM identifies the estimated gains to revenue over the forward estimates period:
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Presumably, the anticipated revenue comprises tax on superannuation fund earnings arising from the catch-up SG amounts paid during the Amnesty period. The estimated $48 million revenue in 2018–19 would also include the contributions tax revenue expected to arise from the payments of historical SG shortfall amounts before the Amnesty ends on 23 May 2019.

While the Amnesty allows the employer to either make payments of SG shortfall amounts directly to the ATO, or make an offsetting contribution directly to the employee’s superannuation fund, it is expected that most employers would pay the SG shortfall amounts to the ATO and not directly to the superannuation funds. An expected consequence would be that, through the Amnesty, the ATO will acquire the details of those employers who have been non-compliant in the past — whether deliberately or through misinformation. The ATO has made it clear that there will be no second chances for these employers in the future. Once the Amnesty period ends, full SGC penalties will apply, including a minimum 50 per cent penalty on top of the SGC amount payable.

Significantly, the implementation of Single Touch Payroll from 1 July 2018 for employers with 20 or more employees (and proposed to apply from 1 July 2019 for smaller employers) will help ensure that the ATO can identify non-compliance faster and more easily than it has in the past.

While the Amnesty is optional for employers, whether an employer decides to take advantage of it or not will have a bearing on the consequences if future ATO activity identifies a historical shortfall (i.e. an employer’s failure to make a disclosure under the Amnesty will affect the penalties they face if the ATO subsequently determines that they have not complied with their SG obligations).

The ATO has warned that where employers do not self-correct SG shortfalls during the Amnesty, they may face higher penalties in the future. In determining any remission of the Part 7 penalty, the ATO will take into account the employer’s ability to access the Amnesty. While the Commissioner must consider the particular circumstances of each case, generally a minimum penalty of 50 per cent of the SGC will apply to employers who could have disclosed during the Amnesty but chose not to.

The Amnesty is not yet law!

The Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 has been referred to the Senate Economics Legislation Committee which is due to report on Monday 18 June 2018. Both Houses of Parliament are scheduled to sit during that week — this is the earliest time that the Bill will be passed. This leaves less than two weeks for employers to make good any unpaid SG shortfall amounts and claim tax deductions for those payments in the 2017–18 income year with certainty. Where an employer chooses to disclose and pay historical unpaid SG before the Bill becomes law, the Amnesty is not yet in place and therefore the ATO will treat this as a standard voluntary disclosure of an unpaid SG amount. This means that the ATO will impose Part 7 penalties and the administration component, and the catch-up payment will not be deductible to the employer.

All employers should be encouraged to pay their workers’ entitlements in full regardless of any tax benefits. An employer’s obligation to pay SG amounts is not a tax akin to payroll tax or Workcover. It is remuneration paid to their employees for their services — albeit paid to their superannuation funds rather than directly to the employees.

We shall monitor the progress of the Bill and report any developments in a future post or via our LinkedIn page.