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Unpaid superannuation is a sleeping giant for employers

Most employers don’t set out to circumvent superannuation requirements, but it might be easier to do than you think. The ATO has proposed a lifeline.

Superannuation is an essential part of every Australian worker’s remuneration, and employers face severe penalties if they get it wrong.

In an effort to encourage employers to pay outstanding superannuation and avoid serious penalties, the Federal Government announced an amnesty proposal for employers earlier this year. The proposed amnesty was to run from May 24, 2018 to May 23, 2019, but is yet to be enacted into law.

If it goes ahead, it could be a non-compliant employer’s saving grace.

A common mistake

The superannuation system can be complicated; it’s easy for employers to trip up on exactly what their obligations are – especially when it comes to contractors. A lot of business owners, CEOs, CFOs and HR Managers don’t know whether a worker is entitled to superannuation.

For example, an employer may think because a worker has told them they have an ABN or there is an Independent Contractor Agreement in place, that they are not required to pay superannuation. But superannuation law extends the definition of ‘employee’ to capture any worker who provides services, the major part of which requires their personal labour or time.

It doesn’t matter if the worker negotiated a higher rate of remuneration or even expressly waived their superannuation in writing. The obligation to pay superannuation is statutory and cannot be contracted away.

However, if contractors work through a company, trust or partnership, the Australian Tax Office (ATO) will not treat them as employees.

The law in this area is unnecessarily complicated for an issue that affects everyday operations. Reforms that provide certainty and consistency around an employee’s status and how they need to be treated consistently for tax purposes – PAYG, superannuation, payroll tax – are needed.

Sometimes workers are genuine “independent contractors” but if employers do not maintain the right documents or records, they are vulnerable if audited by the ATO.

A chance to reform

Sometimes contractors actually are employees, and in this case,  superannuation should be paid accordingly. Failure to do so could mean employers face a massive back payment of unpaid superannuation. The back payment could be so large that a business has to close its doors. Add significant penalties (and interest) and it’s easy to see why people put their head in the sand, making the issue a sleeping giant for the business community.

On an unpaid superannuation exposure of $1 million, the penalty could be as high as an additional $2 million and the interest could be $500,000. That’s a total exposure of $3.5 million. Directors also face personal liabilities of the unpaid superannuation (i.e. the $1 million).

While many employers don’t deliberately set out to circumvent the superannuation system, it still happens, and if the proposal is passed it will be the perfect chance to wipe the slate clean.

With the ATO being allocated more money in the most recent federal budget to chase those failing in their tax obligations, it’s likely it will flex its muscle in this area.

Under the proposed amnesty, employers who self-declare unpaid superannuation are entitled to a 100 per cent waiver on the penalty. In addition to this, the business can potentially claim the full amount of the back payment as an income tax deduction.

Until the amnesty is passed into law the ATO website says it will continue to apply the current law and apply any superannuation declarations retrospectively if the amnesty is passed.

It’s in the interests of employers who have errors in their superannuation payments to self declare and take advantage of the amnesty period regardless of whether it is passed into law.

Employers should pull their heads out of the sand and take this lifeline. It could literally save you millions.

Prath Balasubramaniam is a principal lawyer at Macpherson Kelley

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