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 introduced the Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019 (the Bill), which allows non-complying employers to self-correct any unpaid superannuation guarantee (SG) amounts dating back to 1992 under a one-off SG Amnesty (the Amnesty).
On 19 September 2019, the Senate referred the Bill to the Economics Legislation Committee for inquiry. The Committee released its report on 11 November 2019, and recommended that:
- the Bill be passed; and
- the ATO develops and implements a communication strategy to maximise employer awareness and engagement with the SG Amnesty.
The Committee is confident that the one-off Amnesty provides the best opportunity to address historical SG non-compliance. The Committee heard evidence that the Amnesty will leave no workers worse off and will result in more individuals receiving their full entitlements than would do so if the Amnesty was not in place.
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.
This article explains how the Amnesty will operate once it becomes law.
Why is there a need for the Amnesty?
The original announcement of the Amnesty on 24 May 2018 by the then Minister for Revenue and Financial Services, Kelly O’Dwyer, was unexpected.
The then Minister’s media release explained 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.
According to the media release, the ATO estimated that in 2014–15, around $2.85 billion in SG payments went unpaid. The latest estimate of the SG gap available from the ATO is $2.3 billion for the 2016–17 income year.
The Amnesty was one measure among a suite of 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; and
- improving the effectiveness of the ATO’s various recovery powers, including director penalty notices.
The reintroduction of the proposed legislative amendments into Parliament was announced by Senator Jane Hume, Assistant Minister for Superannuation, Financial Services and Financial Technology. The Minister’s media release states that since the Amnesty was initially announced on 24 May 2018, over 7,000 employers that were eligible for the original Amnesty have voluntarily disclosed historical unpaid SG, and the ATO estimates that an additional 7,000 employers will come forward due to the extension of the Amnesty. It is expected that around $160 million of SG will be paid under the Amnesty.
How does the Amnesty work?
When is the Amnesty effective?
The Amnesty period:
- commences on Thursday 24 May 2018 (being the date that the Amnesty was announced and on which the 2018 Bill was introduced into Parliament); and
- ends six months after the day the Bill receives Royal Assent.
The Amnesty applies only to disclosures of previously undeclared SG shortfall amounts that are made during the Amnesty period. T disclosures must relate to a quarter in the period 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 in relation to a quarter starting 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 six months after the day the Bill receives Royal Assent);
- disclose SG shortfall amounts that have not previously been disclosed;
- make the payment of the SG shortfall amount during the 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 (the 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 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.
Important point regarding non-deductibility of late contributions
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 subjectsthe 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.
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.
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 deductibile
Catch-up SG payments made during the Amnesty period will be tax deductible, i.e. in the 2017–18, the 2018–19, and/or the 2019–20 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 SGA Act.
If the employer enters into a payment plan with the ATO (see below) that extends past the end of the Amnesty period, 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 an approved form and submit it to the ATO.
When the 2018 Bill was before Parliament, the ATO released an SG Amnesty fund payment form which could be submitted electronically through the Business Portal, Tax Agent Portal or BAS Agent Portal. At the time of writing, the ATO has not reinstated the form on its website.
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 approved form with the ATO.
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
- 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.
Commissioner’s ability to remit Part 7 penalties restricted
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. According to the EM, this restriction is intended to strengthen the operation of the Amnesty by providing employers with higher minimum penalties for failing to come forward during the Amnesty.
The restriction on remission of penalties will not apply if the Commissioner considers that there were exceptional circumstances that prevented the employer from disclosing SG non-compliance.
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.
The proposed amendments ensure that employees are not disadvantaged as a result of the Amnesty by having late payments of SG covering a number of years possibly resulting in excess concessional contributions.
Commissioner’s discretion to disregard or reallocate a contribution
If an employee exceeds their concessional contributions cap ($25,000 for 2017–18, 2018–19 and 2019–20) due to contributions made under the Amnesty, the Commissioner may exercise his discretion to disregard these contributions:
- 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). 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);
- 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 and will not be covered by the ‘blanket determination’ mentioned above.
Employees will not be liable for Div 293 tax
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:
Presumably, the anticipated revenue comprises tax on superannuation fund earnings arising from the catch-up SG amounts paid during the Amnesty period. The estimated $43 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. It is unclear why there is a negative revenue impact in 2019–20.
What should employers do?
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 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.
Single Touch Payroll, which is now compulsory for all employers (other than those with closely held payees who have until 1 July 2020 to start reporting), will help ensure that the ATO can identify non-compliance faster and more easily than it has in the past.
Further, 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).
Previously, when the 2018 Bill was before Parliament, the ATO had warned that where employers do not self-correct SG shortfalls during the Amnesty, they may face higher penalties in the future. The ATO advised that, 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. Note that at the time of writing the ATO has not reinstated this previous guidance.
The Amnesty is not yet law!
At the time of writing, the Bill was before the House of Representatives. Both Houses of Parliament are next scheduled to sit from Monday 25 November to Thursday 28 November 2019 — this is the earliest time that the Bill could be passed.
Where an employer chooses to disclose and pay historical unpaid SG before the Bill becomes law, the ATO must apply the current law 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.
If and when the Amnesty becomes law, it would be expected that the ATO will communicate to employers that have already paid the full SGC how it would refund the administration component and Part 7 penalty to those employers that are eligible for the Amnesty. Depending on the timing, employers may also need to amend their tax returns to claim a tax deduction for the payment.
All employers should be encouraged to pay their workers’ entitlements in full regardless of any potential 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 account.
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