Superannuation Guarantee Rate Increases from 1 July 2021: Revisiting the Superannuation Guarantee Rules and What to do Next
Under Australia’s current legislation, employers are required to pay 9.5% of an employee’s ordinary time earnings into a complying superannuation fund. In recent years, there have been concerns that employees will have an insufficient level of superannuation for a comfortable, independent income by the time they retire and will be heavily reliant on the age pension. As such, Parliament legislated a gradual increase of this rate from 9% prior to 30 June 2013 to 12% from 1 July 2025.
The increase in the superannuation guarantee percentage will be stepped gradually to give businesses enough time to plan for the future, with the next increase from 9.5% to 10% taking effect from 1 July 2021.
With less than 3 months for the increase to kick in, it is important to revisit the key aspects of the superannuation guarantee rules and review items for actioning before 30 June 2021.
What is the superannuation guarantee?
The superannuation guarantee is the minimum percentage of an employee’s Ordinary Time Earnings (OTE) that an employer must contribute to an employee’s superannuation fund. This percentage is legislated by the federal government and is regulated by the ATO.
OTE is what your employees earn for their ordinary hours of work. At a broad level, it includes the employee’s regular wage, commission, casual shift loadings, paid leave and some allowances. The ATO has prepared a checklist to assist employers in categorising OTE: Click here.
Please note, from 1 January 2020 salary sacrifice amounts are included in the OTE base and therefore are part of salary and wages.
Who qualifies for the superannuation guarantee?
Generally, superannuation contributions must be paid for:
- an employee aged 18 or over who earns $450 or more (before tax) per calendar month; and
- an employee under age 18 working over 30 hours per week, who earns $450 or more (before tax) a calendar month.
There are many exceptions when you are not required to make superannuation payments for employees. The ATO has a tool that can help you work out whether you need to make superannuation contributions for your employee: Click here.
Superannuation may also be required to be paid for contractors if the service they provide is based on time, rather than outcome even though they have an ABN.
According to the ATO, contractors who are paid mainly for their labour may be considered employees for superannuation guarantee purposes, provided that:
- They’re paid under a verbal or written contract that is predominantly for their labour (more than half the dollar value of the contract is for labour);
- They’re paid for their personal labour and skills such as physical labour, artistry or mental effort; or
- They perform the work personally and don’t delegate it.
In situations where you contract a company, trust or partnership rather than a particular person to provide the labour, you are generally not required to make superannuation guarantee contributions on the contractor’s behalf.
The ATO has a tool to help work out whether your worker is an employee or contractor: Click here.
Is there a limit on how much superannuation guarantee is compulsory?
There is a cap to how much superannuation employers are required to pay, known as the maximum super contribution base. This is used to determine the maximum limit on any individual employee’s earnings base for each quarter for any financial year and employers do not have to pay superannuation on earnings above this limit. For the 2021 financial year, this cap is $57,090 per quarter ($228,360 per year), meaning that employers aren’t required to contribute more than $5,423.55 per quarter to a single employee’s superannuation account.
Please note, from 1 July 2021 the cap is increasing to $58,920 per quarter ($235,680 per year).
How do you pay the superannuation guarantee?
Superannuation guarantee contributions for employees need to be paid electronically into the employee’s complying superannuation fund and you will need to send the associated employee superannuation information electronically in a standard format to meet SuperStream requirements.
The government introduced the SuperStream reforms to make the superannuation system stronger and is designed to prevent errors by providing better visibility.
The only superannuation contributions that do not have to be SuperStream compliant are:
- if you are self-employed or a sole trader and your superannuation contributions are only for yourself; or
- if you are a director or employee of your own incorporated business and the business pays superannuation for you to your own self-managed superannuation fund (SMSF). However, superannuation contributions to any superannuation fund other than your own SMSF and for all other employees do need to be SuperStream compliant.
One way to meet the SuperStream requirements is to pay superannuation through a compliant clearing house. Rather than making separate payments to each employee’s superannuation fund, a clearing house allows you to make just one payment.
When does the superannuation guarantee have to be paid by?
Superannuation guarantee contributions are assessed on a quarterly basis and are required to be paid by the 28th of the month following the end of each quarter.
In order to be entitled to a tax deduction, employers should consider paying these contributions before the quarterly due dates as the contributions will only be tax deductible once the employees superannuation funds have received the contributions.
What happens when the superannuation guarantee is paid late?
Any unpaid superannuation guarantee is a debt of the Commonwealth rather than to the employee and if not paid by the due date employers are required to lodge a superannuation guarantee charge (SGC) statement which is lodged with the ATO (and payable to the ATO). The SGC statement includes the following components:
- Superannuation guarantee shortfall amounts calculated on the employee’s salary or wages (not ordinary time earnings);
- A nominal interest component (currently 10%); and
- An administration component ($20 per employee per quarter)
In addition, the SGC is not tax deductible for the employer. Even though this is a tax disadvantage to the business, there may be other penalties when failing to meet an SGC liability and even the director of a company can be held personally liable.
What to do next with the increasing of the superannuation guarantee percentage?
- Check with your payroll software provider to ensure they are factoring in this rate change;
- Check to ensure your payroll system is correctly capturing all amounts that are OTE, and is excluding all amounts that are not OTE;
- Any employee agreements with a superannuation guarantee rate of more than 9.5%, but less than 10% must be reviewed and updated;
- Remuneration packages will need to be reviewed – this could mean a pay decrease for employees with fixed packages. For example, an employee earning a $100,000 salary package with the current 9.5% superannuation contribution, would currently receive a before tax total of $91,324.20, however, with the superannuation guarantee rate increasing to 10%, the before-tax pay will be decreasing to $90,909.09.
With the superannuation guarantee rate set to shortly increase, it is an opportune time to not only review your employees’ agreements and remuneration packages, but also your superannuation guarantee compliance and ensure you have safeguards in place to prevent any shortfalls.