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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:

 Condition  Comment
 1. The Commissioner considers that, disregarding the effect of issuing the certificate, the employee is likely to exceed their CC cap for the financial year that includes the relevant quarter There is no requirement that the Commissioner be satisfied that the employee will exceed their CC cap for the financial year.

The certificate is applied for in advance of the relevant quarter (see below), and certainly prior to the end of the income year before the employee knows whether they will exceed their CC cap.

An employer will not be liable for the SGC if they don’t pay SG contributions for the employee for a quarter as long that employee is covered by a certificate for that quarter, even if it turns out that the employee would not have exceeded their CC cap had the employer’s MCB not been reduced to nil by the certificate.

In reaching a view on this issue, the Commissioner may rely on any information including past tax return data, Single Touch Payroll reporting data and information provided in the employee’s application to make this assessment.

 2. The Commissioner is satisfied that, after issuing the certificate, the employee will have at least one employer that would have an SG shortfall in relation to the employee if they did not make any SG contributions for their benefit A certificate will ‘relieve’ an employer of their obligation to pay SG contributions for an employee for a quarter covered by that certificate only if the employee has at least one other employer who is making SG contributions for their benefit.

It is not relevant that the amount of the SG contributions paid by the other employer(s) may be less than $25,000.

The Commissioner may issue multiple certificates in relation to a single employee; each certificate covers a different employer.

The proposed measure does not require the employer covered by the certificate to ‘top up’ the employee’s concessional contributions to the $25,000 cap; the effect of the certificate is to reduce the employer’s obligation to pay SG contributions to nil.

If the employee wants to maximise their concessional contributions, they could:

  • arrange with the employer covered by the certificate to pay an additional amount (note this will constitute a reportable superannuation contribution instead of an SG contribution); or
  •  make a personal concessional contribution and claim the amount as a deduction in their tax return.
3. The Commissioner considers that it is appropriate to issue the certificate in the circumstances It may be appropriate for the Commissioner to deny an application for a certificate where an employee has applied for a certificate that would reduce their contributions by a substantially larger amount than is necessary, relative to another possible certificate or where the Commissioner has already issued a certificate for another quarter in the same financial year (see Example 2 below).

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 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 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 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.