Payday super (PDS) is more than two years away, but there is much to think about when it comes to successfully designing and implementing PDS. Under PDS, employers will be required, from 1 July 2026, to pay their employees’ superannuation guarantee (SG) contributions at the same time as their salary and wages. This new policy will replace the current SG regime, which has been in place since 1 July 1992 and requires employers to pay SG contributions at least every quarter. The policy change will be wide-sweeping, affecting employers’ cash flow, systems and processes across a wide range of stakeholders.
Context of the reforms
The objective of PDS is to improve employers’ compliance with their SG obligations, but one of the primary benefits that PDS will bring to employees is the earlier payment of their SG contributions into their superannuation account. This will generate earnings on those contributions earlier and their retirement savings will benefit from the compounding effect of this over time.
Constitutionally, the Commonwealth cannot require employers to pay employees’ superannuation, but it can impose a penalty on an entity for failing to pay a tax or lodge a statement with the ATO. This explains why the current obligation on employers under the Superannuation Guarantee (Administration) Act 1992 is not framed as a positive obligation to pay superannuation each quarter.
Instead, the law currently makes employers liable to pay a tax — the SG charge (SGC) — where there is an SG shortfall for a quarter for an employee. When calculating the SG shortfall, the charge percentage is reduced by contributions that are paid for eligible employees to a complying superannuation fund by the prescribed date (i.e. where the employer has provided a minimum level of superannuation support for their employees). The charge percentage is currently 11% and rises to 11.5% from 1 July 2024 and then 12% from 1 July 2025.
The Treasurer, the Hon Dr Jim Chalmers MP and the Assistant Treasurer, the Hon Stephen Jones MP, first jointly announced the new PDS policy on 2 May 2023. It formed part of the Federal Budget 2023–24 measures announced on 9 May 2023. Preceding this policy are decades of debate by government, community and industry stakeholders, multiple reviews and reports, and frequent legislative and regulatory amendments relating to the superannuation system.
Two objectives sit at the heart of PDS:
- determining the best way to fund the retirement of millions of Australians through the superannuation system; and
- ensuring that appropriate safeguards and consequences are in place to encourage employers to meet their obligations, face just (as in, ‘fair’) penalties when they do not, and protect employees’ entitlements.
Why has government policy changed?
We all know that employers have statutory obligations to pay regular SG contributions for their employees, but the problem of some employers underpaying, or failing to pay, their employees’ superannuation persists and directly affects the financial future of millions of Australian workers. This underpins the Government’s decision to mandate real-time payment of employees’ superannuation from 1 July 2026.
The ATO’s SG tax gap analysis reveals the difference between the estimated theoretical SG liability and what was paid without intervention from the ATO. According to the ATO’s tax gap figures for 2020–21, the net SG gap is 5.1%. This could be positively interpreted that nearly 95% of employers are meeting their SG obligations, but it also means that, in that period, $3.619 billion of superannuation entitlements were not paid. The ATO’s gap analysis shows that the net gap was more than $3 billion in five out of the six years from 2015–16 to 2020–21. The ATO’s Super guarantee compliance snapshot 2022–23 also sets out the SG gap, debt levels and ATO compliance action.
In recent years, the following other parliamentary and industry reports support these findings:
According to the ATO, more than 60% of employers pay their employees’ superannuation quarterly, and nearly 40% pay more regularly than quarterly. Changing from paying SG quarterly to what could be as frequently as weekly will necessitate a massive shift in and redesign of processes, systems, mindset and behaviour. Successful implementation of PDS will require good law design and administration, effective communication and education for employers and timely system upgrades. A key feature in designing software to enable PDS will be to leverage existing natural business systems.
Targeted consultation considers a wide range of issues
Treasury and the ATO commenced targeted consultation in June 2023. This has involved a series of facilitated workshops, and recurring meetings with key stakeholders from the tax, accounting and superannuation sectors, The Tax Institute and other professional associations, industry bodies, small business and employer groups, superannuation funds, clearing houses, payroll service providers, digital service providers (DSPs) and other intermediaries.
The purpose of targeted consultation is to obtain feedback from key stakeholders to inform the design of the new law and its administration by testing various models. It provides a valuable opportunity to raise concerns, make suggestions and recommendations and provide perspectives on the design of the policy that may not have been fully considered.
Sensibly, the law is being co-designed with the administration of the new regime. This means that how the ATO will administer the new law is being considered as part of the law design phase. Effective consultation seeks to minimise the likelihood of unintended outcomes or administrative shortcomings that could be very difficult to resolve once the system goes live.
Many aspects of the superannuation system need to be reshaped to enable PDS. These include the following considerations:
- onboarding processes for new employees — the early verification of data and identifying the ‘source of truth’ of the relevant data is crucial;
- interaction of the timing rules around STP pay events with the date by when the employees’ superannuation account must receive the contribution to avoid an SG shortfall;
- redesign of the SGC — namely, the earnings base on which the charge is imposed, the nominal interest component and the administration component;
- design of the Part 7 penalty (currently equal to twice the SGC) for failing to lodge an SG statement with the Commissioner when an SG shortfall arises;
- inability of the Commissioner to currently remit in part or full any amount of the SGC;
- advance payments of salary and wages;
- adjustments to and corrections of under- and over-payments;
- employer contributions other than SG contributions, such as salary sacrifice contributions (the Minister’s powers over salary sacrifice contributions are limited);
- processing periods associated making electronic payments through clearing houses;
- interaction with SuperStream and MATS requirements;
- interaction of PDS with the contribution cap rules and income tax deductibility provisions;
- operation of the maximum contribution base mechanism;
- operation of the employer shortfall exemption certificate;
- utilising myGovID, myGov and other ATO systems/platforms;
- application to self-managed superannuation funds (SMSFs), defined benefit funds, contractors, stapled superannuation and choice of fund rules; and
- exceptions and rejected payments.
Next steps
A Treasury consultation paper, released on 9 October 2023, sought feedback from stakeholders. In our joint submission to Treasury on the consultation paper by The Tax Institute and other professional associations (Joint Bodies)here, the Joint Bodies support PDS and recognise this as a rare opportunity to address a range of actual and perceived shortcomings and deficiencies in the current system.
The Joint Bodies are of the view that:
- PDS should be implemented in a manner that reduces compliance costs, utilises existing reporting mechanisms and avoids duplication of effort;
- redesigning the SGC and the associated penalties is essential so they are simpler, more effective and more accurately compensate employees’ superannuation accounts for the loss in earnings for the duration of unpaid SG contributions;
- penalties for non-compliance should be imposed on employers on a proportionate basis so those who make an honest mistake or are only one day late are treated less harshly than those who engage in egregious non-payment and disregard of their SG obligations;
- employers should be incentivised to come forward and report SG shortfalls;
- an appropriate transitional mechanism should be allowed so employers, SMSFs and DSPs have the time to adapt to their new obligations, including an amnesty to encourage employers to rectify historical SG shortfall amounts; and
- the ATO’s systems and software providers should utilise available technologies so PDS can be successfully implemented.
It is expected that feedback on the consultation paper and continuing targeted consultation will inform further announcements anticipated as part of the Federal Budget 2024–25 on 14 May 2024. The release of exposure draft legislation for public comment is expected during 2024. Feedback on the draft package of reforms would then bring about the final design of the law in the form of an enabling bill introduced into Parliament in 2024. This should then allow PDS to be enshrined into law at least a year ahead of the announced start date of 1 July 2026 so all stakeholders can ready themselves for the new regime.
Closing comments
The current SGC regime was designed and enacted more than 30 years ago, and its archaic legacy design is no longer fit for the present, or the future. While 1 July 2026 sounds like a long way off, there is much to do between now and then for a successful implementation of PDS. The new regime may not remedy every problem, shortcoming and failing of the current superannuation system, but it does provide a rare, and golden, opportunity to overhaul the rules so employees receive their superannuation entitlements and employers who fail to meet their obligations face fair and proportionate penalties that align with their degree of culpability.
