Introduction With 30 June 2020 a mere few sleeps away, now is the opportune time for accounting and tax professionals to enjoy some light-hearted relief from the ongoing challenges of a difficult 2020 financial year. The TaxBanter team presents the following...
On 18 September 2019, the Government announced that it was reintroducing the one-off Superannuation Guarantee Amnesty (the Amnesty) that was originally announced on 24 May 2018. On the same day, the Government introduced the Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019 (the Bill) into Parliament. The proposed amendments allow non-complying employers to self-correct any unpaid superannuation guarantee (SG) amounts dating back to 1992.
Amendments to give effect to an SG Amnesty were previously proposed in the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 (the 2018 Bill) which was before the Senate when Parliament was prorogued prior to the 2019 Federal election, and which lapsed on 1 July 2019 with the commencement of the 46th Parliament.
For the sake of space and expression, the proposed Amnesty will be hereafter referred to as simply ‘the Amnesty’.
The amendments as reintroduced are the same as those in the 2018 Bill, except in relation to the following:
- while the start date for the Amnesty is still 24 May 2018 as originally announced, the Amnesty is proposed to end six months after the day the Bill receives Royal Assent (previously, the Amnesty period was to last for 12 months and end on 23 May 2019); and
- once the Amnesty has ended, the Commissioner’s ability to remit penalties for historical SG non-compliance imposed on employers with a historical SG shortfall that is not disclosed during the Amnesty will be limited.
The Bill is currently before the House of Representatives, so the Amnesty does not yet have the force of law.
Even though the Amnesty is not yet law, a number of technical questions have arisen since the Amnesty was first announced on 24 May 2018.
This blog will not repeat in detail the technical content of our previous discussion on the Amnesty. For an explanation of the workings of the Amnesty please see our previous blog posted on 1 November 2019.
Overview of current SGC components
Under s. 17 of the Superannuation Guarantee (Administration) Act 1992 (SGA Act), 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) — s. 59 of the SGA Act; and
- the general interest charge (GIC) on the unpaid amount.
Further, aside from the GIC on any late payment of the SGC, 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 six months after the day the Bill receives Royal Assent.
What period is covered by the Amnesty?
The Amnesty applies to previously undeclared SG shortfalls for any quarter starting no earlier than 1 July 1992 and ending no later than 31 March 2018. The Amnesty will not be available for SG non-compliance that occurs in relation to a quarter starting on or after 1 April 2018.
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 examination 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 Bill is enacted, the Amnesty will apply retrospectively (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 six months after the day the Bill receives Royal Assent.
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 ATO must continue to apply the current law which means that:
- the administration component of the SG charge remains payable; and
- deductions cannot be claimed.
Notably, although the ATO has a discretion to remit the Part 7 penalty (see practice statement PS LA 2011/28 and draft practice statement PS LA 2019/D1), the ATO does not have any discretion regarding the imposition of the administration component.
Accordingly, the ATO will continue to apply, and require payment of, the administration component unless and until the Bill is enacted. Once that occurs, we would expect the ATO to remit/refund the administration component to those employers who are eligible for the Amnesty.
If the legislation is not enacted
If the Bill 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 reviewed to ensure they included 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 Bill does not pass, as these amounts were always payable under the existing law.
What happens if the employee is now aged 75 years or over, or is aged 65-74 and doesn’t pass the work test?
Consider the situation where the employee was less than 65 years of age, or was aged 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 aged 75 years or more, or is aged 65–74 and does not satisfy the work test, in the 2017–18, the 2018–19, or the 2019–20 income year, when the employer makes an Amnesty payment. The individual may or may not still be employed by the employer. Could this affect whether the superannuation fund is able to accept the contribution?
The 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:
- reduce the employer’s potential liability for SGC;
- are payments of shortfall components.
Where an employer makes a payment under the Amnesty:
- to the ATO — these are ‘payments of shortfall components’ under Part 8 of the SGA Act and fall within the second point above;
- directly to a superannuation fund — they are making contributions and claiming the late payment offset under s. 23A of the SGA Act. The contributions reduce their ‘potential liability for SGC’ and fall within the first 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.
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 SGA Act. 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 2017–18, the 2018–19, or the 2019–20 income year, when the 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 SGA Act. 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 years of age.
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.
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 2017–18, the 2018–19, or the 2019–20 income year, when the 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 SGA Act (from 1 January 2006) extends the application of s. 19 of the SGA Act to treat former employees as employees. The SGA Act 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 SGA Act. 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.
Under s. 23(9A) of the SGA Act, 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 SGA Act 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.
|To the extent that …||.. the beneficiary is a death benefits dependant of the deceased||… the beneficiary is not a death benefits dependant of the deceased|
|Treatment of superannuation death benefit under s. 302-10||The benefit is treated as if it had been paid to the LPR as a person who was a death benefits dependant of the deceased.
No one is taken to be presently entitled to that amount which has the effect of making the LPR the relevant taxpayer.
|The benefit is treated as if it had been paid to the LPR as a person who was not a death benefits dependant of the deceased.
No one is taken to be presently entitled to that amount which has the effect of making the LPR the relevant taxpayer.
|Tax treatment of the benefit||The benefit is neither assessable income nor exempt income of the LPR (under s. 302-60).
i.e. the Amnesty payment is tax-free to the LPR.
|The taxable component of the benefit is assessable income of the LPR (under s. 302-145).
i.e. the Amnesty payment is taxable to the LPR.
The LPR will be entitled to a tax offset that ensures that the rate of tax on the elements taxed and untaxed in the fund does not exceed 15 per cent and 30 per cent respectively.
The detailed tax treatment of superannuation death benefits is beyond the scope of this blog.
The definition of a death benefits dependant is set out in s. 302-195(1) of the ITAA 1997 and means:
- the deceased person’s spouse or former spouse;
- the deceased person’s child aged less than 18;
- any other person with whom the deceased person had an interdependency relationship under s. 302-200 just before they died; or
- 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 is 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 2017–18, 2018–19, or 2019–20 as not forming part of that 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 2017–18, 2018–19, or 2019–20 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 SGA Act.
Offsetting contribution under s. 23A
Under s. 23A of the SGA Act, an employer has up to four years after the employer’s original assessment for a quarter is made to make an irrevocable election to offset a late payment against the SGC.
There is a timeframe for late payments to be treated in this way. The offset is available only for late payments made after the 28th day after the end of a quarter (i.e. the due date for the SG contribution) but before the earlier of lodging an SG statement or receiving a default assessment from the Commissioner.
ATO’s previous guidance
The ATO previously advised — when the 2018 Bill was before Parliament — 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 has not republished this guidance at the time of writing.
I am a closely held employer. Can I use the Amnesty for myself?
Nothing in the Bill limits 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 business owner’s Div 293 income and won’t cause the business 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.
Where an employer pays the SGC to the ATO, the employee will not need to apply for the Commissioner’s discretion. The exercise of the Commissioner’s discretion to make a determination to disregard the excess contribution will be streamlined by allowing the Commissioner to make such a determination on the Commissioner’s own initiative (i.e. a ‘blanket determination’ for affected employees).
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 an exercise of the Commissioner’s discretion under s. 292-465 of the ITAA 1997.
I can deal with the SGC issue by not claiming a tax deduction for a late SG payment, can’t I?
The SGA Act provides that an employer reduces their SGC liability by:
- paying correct SG contributions into a complying fund for their SG employees by the 28th day following the end of a quarter (failure to do this makes them liable for the SGC); or
- electing to treat a late payment to a superannuation fund as an offsetting contribution under s. 23A of the SGA Act.
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.
It is a common misconception that a late SG contribution (i.e. one paid after the 28th day of the month following the end of the quarter) — even a contribution paid one day late — is non-deductible.
Nothing in the ITAA or the SGA Act treats a contribution as non-deductible just because it’s late.
Under the ITAA 1997:
- s. 290-10 prevents a deduction for contributions except under Div 290;
- s. 290-60 allows an employer to deduct contributions made to a complying fund for SG employees;
- s. 26-95 denies a deduction for the SGC.
Where an employer has an SG shortfall (whether due to late payment or non-payment), they are liable for the SGC which, under self-assessment, requires them to disclose this to the ATO by:
- paying the SGC (comprising the SG shortfall, the nominal interest and the administration component as discussed above) — failure to do this subjects the employer to the GIC and could give rise to the issue of an estimate under Div 268 or a director penalty notice under Div 269 of Schedule 1 to the TAA 1953; and
- lodging an SG statement — failure to do this subjects the employer to the 200 per cent Part 7 penalty.
A late SG contribution is deductible, unless it is SGC (s. 26-95). Crucially, the ITAA cannot be used to manage an SGC issue; merely adding back a late contribution for income tax purposes does not deal with the SG shortfall.
A late contribution:
- may be eligible for treatment as an offset under s. 23A of the SGA Act (conditions apply, see below);
- can be managed by the proposed SG Amnesty, which will necessitate making a disclosure and payment during the Amnesty period, however, this will result in the contribution effectively being paid twice.
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.
When the 2018 Bill was before Parliament, the ATO 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). The ATO has not re-announced this guidance at the time of writing.
Further, the Bill proposes that from the day after the Amnesty period ends, the Commissioner’s ability to remit Part 7 penalties on an employer that has failed to disclose to the Commissioner information that is relevant to the amount of the employer’s SG shortfall for a historical quarter covered by the Amnesty will be restricted. The Commissioner will not be able to remit penalties below 100 per cent of the SG charge payable. This restriction will not apply if the Commissioner considers that there were exceptional circumstances that prevented the employer from disclosing SG non-compliance.
Remember that extensive payroll reporting through Single Touch Payroll, which is now mandatory for all employers (other than those with closely held payees who have until 1 July 2020 to start reporting), will allow the ATO even greater transparency over employers’ payroll obligations …
… so now is the time to get your house in order.
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