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What is the Superannuation Guarantee Charge?

Thursday, July 20, 2006
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The Superannuation Guarantee Charge (SGC) scheme began on 1 July 1992 and requires all employers to provide a set, minimum level of superannuation each year for each employee. Where an employer fails to provide the minimum level of support, the employer is liable to pay the SGC (like a tax).

The scheme is administered on a self assessment basis (you determine if the tax is payable). The SGC is not tax deductible, whereas contributions to a superannuation fund for the benefit of employees are generally tax deductible.

Superannuation contributions should be paid into a "complying superannuation fund" or the ATO. (Speak to your accountant regarding "complying" funds).

An employer's superannuation contributions for employees which are made in accordance with a Commonwealth, State or Territory law, an industrial award or occupational arrangement count towards an employer's obligations.

The level of superannuation contributions is measured for each employee on a quarterly basis. That is, each three months commencing 1 July, 1 October, 1 January and 1 April.

To avoid the SGC, the superannuation contributions must be paid within 28 days of the end of the financial year (i.e. 28 July).

Who Must Comply?

The superannuation scheme applies to all employers in respect of full-time, part-time and casual employees, with limited exceptions and additions. The terms 'employer' and 'employee' have their ordinary meaning.

Basically, an employee is any person who receives salary or wages (i.e. payments are subject to PAYG tax) or is paid under a contract principally for labour, and the person making the payment is the 'employer'.

All Governments, statutory authorities and municipal bodies are required to provide the minimum level of contribution to employees.

The PAYG provisions which extend the definition of "salary and wages" to contractors (for doing work or to produce a result), will also apply to the SGC.

Examples of employees
The ATO has issued guidelines for the following persons:

  • a guest speaker may be an employee, as they are engaged under a contract principally for labour (even if the person is not an employee at common law).
  • a courier driver may be an employee either at common law. Contract courier drivers are not generally employees.
  • a director of a company, even if fees are accounted to another party, is an employee.
  • a paid member of an executive body is an employee.
  • whether an entertainer (and support staff) is an employee depends on the specific terms of the agreement (i.e. direct engagement, commission agency) between the parties. A band is a partnership and not an employee.
  • a person who provides home-based child care is not usually an employee, unless the carer provides child care in the parents' own home (i.e. nanny).
  • where an employment agency is used (eg security, temp) the service or labour hire firm is the employer.
  • prize moneys and appearance fees, but not player awards (i.e. "player of the match"), paid to professional sports persons for sport or promotional activities are "salary or wages". All prize money in a competitive event is exempt.
  • visiting medical officers are generally employees because they are engaged under labour contracts (unless they have a right of delegation).

An employer is not required (but may do so) to provide superannuation support for the following "exempt" employees. Award superannuation applies.

  • employees under 18 and working less than 30 hours/week (determined on a weekly basis);
  • employees aged 70 and over;
  • resident employees employed by non-resident employers for work done outside Australia; or
  • foreign executives with a Class 413 visa
  • employees receiving wages under the Community Development Employment Program.
  • a person who holds office as a member of a local government council that is not an "eligible local governing body".
  • a person who does domestic/private work for less than 30 hours/week.
  • employees who elect not to receive superannuation guarantee support because their accumulated super benefits exceed the pension RBL.

Employer Minimum Support

The minimum level of superannuation support (called "charge percentage") that an employer must provide for an employee is set out as follows. The rate is currently 9% for all employers, as of 1 July 2002.

Charge Percentage (%)

Financial Year

Employer’s base year payroll $1,000,000 or less

Employer’s base year payroll above $1,000,000

1995-96

5

6

1996-97

6

6

1997-98

6

6

1998-99

7

7

1999-00

7

7

2000-01

8

8

2001-02

8

8

2002-03 and beyond

9

9

What the employer must provide

An employer must provide a minimum level of superannuation support based on an employee's "notional earnings base", that is, an employee's earnings. There are a few ways to determine an employee's earning base.

Usually it is stated in a superannuation fund's trust deed, an industrial award, a law of the Commonwealth, State or Territory or under an agreement with the employee. In some cases, the earnings of a standard employee or the base established for a particular industry may be used.

If there is no acceptable earnings base relevant to the employee, then "Ordinary Times Earnings" (OTE) of the employee is used. In all cases, the notional earnings base is subject to a maximum.

The calculation of the notional earnings base is performed at the end of each contribution period (i.e. 30 September, 31 December, 31 March, 30 June). However, the "type" of earning base used is determined at the latest of: (1) the first day of the contribution period; (2) the day the employee commenced employment; or (3) the day the employer commenced to make contributions to the fund.

The final earnings base selected will largely depend on whether the employer was contributing to a superannuation fund for employees on 20 August 1991.

If the current employer was contributing to a superannuation fund on 20 August 1991 and is still contributing, the notional earnings base for the employee is the earnings base used at 20 August 1991 by the employer. For example, a fund that states contributions are 7% of an employee's salary is considered to have an earnings base of "salary".

If the fund's trust deed is amended after 20 August 1991 and the earnings base is reduced, then the notional earnings base is determined as if no support was provided on 20 August 1991.

An employer making superannuation contributions under an award or law which was operative before 21 August 1991, and which required contributions to be based on earnings of a standard employee, may use the standard employee as the earnings base.

Where superannuation contributions under an industrial award are based on a fixed sum, the earnings for all full time employees in that class will be the notional earnings base of the employee.

For example, if the award requires a flat $20 per week, based on a Grade 1 driver, the notional earnings base for employees under the award will be the base rate earnings of the Grade 1 driver.

Assuming the Grade 1 driver (as in the previous example) works full time in the July/September quarter (i.e. 528 hours) and the notional earnings base is $20,000 for the quarter. Another driver under the award who works three days per week in the same quarter (i.e. 320 hours) will have a notional earnings base of $ 12,121 (320 divided by 528 x $20,000).

Where an employer was not contributing to a superannuation fund on 20 August 1991 for the employee (or was doing so, and the earnings base has been reduced), the notional earnings base will be one of the following:

  • if the employer is currently contributing to a superannuation fund, use the earnings base as specified, provided it is equal to or greater than Ordinary Time Earnings (OTE);
  • if the employer is currently contributing under an award, but the earnings base is less than OTE, still use the earnings base specified in the award; or
  • any other case - OTE.

Thus, a person's earning base is usually at least OTE, or the award base if less.
There is, however, a maximum notional earnings base. For 2002/2003, the maximum contribution base is $29,220 per quarter or $116,880 per annum.

An employer does not have to provide super for earnings in excess of the threshold.

Ordinary Times Earnings (OTE)

OTE is the total of the employee's earnings in respect of ordinary hours of work and earnings for over-award payments, shift loading and commission. For example, an employee in the hospitality industry works from Thursday to Monday, including the weekend. This is the employee's permanent shift.

Superannuation is payable based on the employee's total wages. Although the shift included weekend work, the superannuation guarantee law classifies this as an over-award payment rather than overtime because it is the employee's permanent shift.

A further checklist of payments is in Ruling SGR 94/4. A summary is provided below. (Note: OTE cannot exceed the maximum contribution base - $116,880 pa.) Lump sum payments on termination in lieu of unused annual leave, long service leave or sick leave are excluded from OTE. Fringe benefits are also excluded.

Payment

Subject to Super Contributions?

Allowances (other than a reimbursement of expenses)

Yes

Annual holiday leave taken

Yes

Bonuses that do relate to specific performance

Yes

Commission

Yes

Casual loading

Yes

Director’s fees

Yes

Government (wage) subsidies, e.g. jobs start allowance
(except CDEP)

Yes

Long service leave taken

Yes

Over award payments

Yes

Payments for performance in, or provision of services relating to, entertainment, sport, promotions, films, discs, tapes, TV, or radio

Yes

Payments to contractor who is an "employee"
for SGC purposes

Yes

Shift loading

Yes

Sick leave taken

Yes

Workers compensation payments, including "top-up" payments, paid by the employer, where work is performed

Yes

Accrued annual leave, long service leave and sick leave paid as a lump sum on termination

No

Annual leave loading

No

Benefits subject to fringe benefits tax

No

Bonuses that do not relate to specific performance criteria (eg. Christmas bonuses)

No

Dividends

No

Maternity or paternity leave **

No

Other payments made by an employer on termination of employment

No

Overtime (not part of permanent shift)

No

Payments for domestic or private work under 30 hours per week

No

Payments for entering into a restraint of trade
agreement

No

Payment in lieu of notice

No

Redundancy payments

No

Reimbursement of expenses (eg. travel costs)

No

"Top-up" payments, eg. when serving on jury
duty or with reserve forces, etc.

No

Workers compensation payments, including
"top-up" payments, where no work is performed **

No

** Under the provisions of some Award-based superannuation funds, contributions are payable by the employer in respect of these items.

Contribution Limits

The aged based deduction limits for superannuation contributions in 2002/2003 are as follows:
Under 35 years = $12,651
35 to 49 = $35,138
50 and over = $87,054

The surcharge threshold for 2002/2003 is $90,527 (SGD 2002/3). This means that employees with an adjusted taxable income below $90,527 in 2002/2003 do not have to pay contributions surcharge.

The indexable amounts for 2002/2003 are $1,295, $90,527 and $109,924. These figures are used in the formula to determine the rate of contributions surcharge payable.

Measuring the Level of Super Support

An employer is required to measure the actual level of superannuation support provided to each employee during each "contribution" period. The level of support reduces the charge percentage to determine if there is a SGC shortfall.

The method of measuring the superannuation support depends on whether the fund used is a "Defined Benefit Superannuation Scheme" or another type of fund. However, in all cases, the fund used must be a complying superannuation fund. (A deposit into the Superannuation Holding Account Reserve (SHAR) is taken as if it were a contribution made to a complying fund).

Where an employer contributes to a defined benefit superannuation scheme, a benefit certificate must be obtained from an actuary.

The certificate states the percentage level of support (eg. 9%) provided for each class of employees in the scheme (called the "notional employer contribution rate"). This rate "reduces" the charge percentage (refer calculations below).

Where a fund other than a defined benefit superannuation scheme is used, the actual contributions paid to the fund by the employer will have to be converted to a percentage.

The percentage calculated (eg. 9%) is then used to reduce the charge percentage (refer calculations below). If the employee is only employed for part of the period, the percentage level of support is adjusted proportionately.

Example
John was employed on 1 July 2001 and has a notional earnings base of $9,000 (for the quarter) under an award superannuation agreement. The employer contributes $500 to the award fund. The employer also contributed $300 to an employer-sponsored fund, which has an earnings base of gross salary ($10,000 for the quarter).

The employer's percentage level of superannuation support is:
under the award

total contributions in period x 100
employee's notional earnings 1
base

$500 x 100 = 5.55%
$9,000 1

under the employer arrangement

$300 = 3%
$10,000

The total percentage level of superannuation support for the period is 5.55% + 3% = 8.55%.

Where an employee receives superannuation support for only part of a period, the percentage must be adjusted. Using the previous example, if John was covered by the award only from 1 August 1999, the percentage for the quarter would have been:
$300 (employer contributions in period) x61 daysx100 = 3.06%
$6,500 (notional earnings base in period) 92 days 1

For flat dollar award contributions, the percentage level of employer support is calculated by reference to the amount of actual contributions paid by the employer as a proportion of the standard employee's notional earnings base.

Salary Sacrifice

The ATO considers that superannuation contributions under a salary sacrifice arrangement are made by the employer if the employee's reduced salary is the level on which the employee pays income tax.

After tax salary amounts withheld by the employer and contributed to a fund on an employee's behalf are employee contributions.

ATO Collection Mechanism (SHAR)
The ATO established a collection mechanism to receive small superannuation contributions. Payments to the ATO's "Superannuation Holding Accounts Reserve" (SHAR) are treated "as if" they were payments to a complying fund.

Employers are able to make payments to the ATO where the amount of contribution is less than $1,200 per year for an employee. The money received by the ATO is not reduced by any administrative charge and interest is payable on amounts held up to $1,200. At any time employees may have the money in the SHAR account transferred to a regulated or public sector fund.

However, superannuation funds cannot be transferred into the SHAR account.

Application can be made to the ATO to withdraw contributions to the SHAR account if:

  • the employee has retired due to permanent disability
  • the employee is aged 65 or more
  • the employee dies and a legal personal representative applies for withdrawal of the account balance
  • the employee's account has a balance of less than $200 and has ceased employment with the employer that made the deposit
  • the employee is in receipt of specified Commonwealth "income support payments" for a certain period depending on age
  • the employee is at least 55 years of age and not an Australia resident and not in employment, or is employed but the duties are performed wholly and principally outside Australia.

    These amounts can be directly paid to the employee.

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    17/09/2014 17:32Sydney, Australia. 17 September,2014
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