Punitive costs may be imposed on employers by the ATO for failure to meet their quarterly superannuation guarantee (SG) obligations on time – even if the payment is just one day late.
Employers that do not pay their employees’ super on time and in full are required to pay a superannuation guarantee charge (SGC).
The SGC is calculated as the sum of:
- The shortfall amount – which is calculated on employees’ salary and wages, rather than their ordinary time earnings (OTE)
- A nominal interest component of 10 percent of the shortfall amount from the beginning of the quarter in which the contribution was required to be made until the lodgment of an SGC statement (note – late payment of the SG does not stop the interest from accruing), and
- A $20 administration fee per employee.
The potentially costly impact of the SGC is shown in the following example:
An employer with 10 employees had a super liability for the March 2015 quarter of $9,500 (based on OTE of $100,000). The total salary and wages (which includes other amounts such as overtime and allowances) paid to employees for the quarter was $110,000.
The employer pays the super guarantee of $9,500 in full on 29 April 2015 (just one day late).
Assume the employer is subject to an audit three years in the future and submits SGC forms to the ATO on 5 May 2018. The employer also makes the Late Payment Offset Election (LPOE) to offset the super guarantee paid late against the SGC.
The SGC payable by employer would be approximately $4,637, comprised of the following:
- Shortfall amount of $10,450 (being total salary and wages of $110,000 x 9.5 percent)
- Interest of $3,487
- Admin fee of $200
- Less: LPOE amount of $9,500.
The SGC payable is significant considering the actual amount of SG contributions of $9,500 was only paid one day late.
The ATO previously applied a Practical Compliance approach where an employer could pay ‘top-up’ interest of 10 percent directly to an employee’s fund to compensate them for lost earnings rather than paying the SGC. However, the ATO discontinued this approach from June 2017.
Unfortunately, the SGC can apply irrespective of whether the failure to make SG contributions is deliberate avoidance, an inadvertent mistake or a misunderstanding of the complex legislation (for example, in determining whether an individual is a contractor or an employee for SG purposes). There is also no discretion for the Commissioner to reduce the amount of SGC.
In addition to having to pay the SGC, employers should be aware of the other potential penalties and consequences of not meeting their super obligations:
- The entire SGC amount (that is the shortfall, the nominal interest and the administration charge) is not tax deductible
- General interest charges also accrue on the SGC until it is paid
- The ATO can impose other penalties. For example, the maximum penalty for failing to provide an SGC statement when required is 200 percent of the SGC payable
- Directors of a company that fails to meet an SGC liability in full by the due date can become personally liable for a penalty equal to the unpaid amount.
The government recently released draft legislation to impose criminal penalties, including up to 12 months in jail for employers (including directors of companies that employ staff) who fail to comply with a direction to pay outstanding superannuation guarantee.
The ATO and superannuation funds are improving their detection of late SG payments. Therefore, employers that discover they have not met their SG obligations should take steps to rectify the situation as soon as possible. Employers can mitigate the risk of non-compliance by paying their super guarantee monthly (so if, for example, a payment is missed the impact is only one-third of what it could have been) and by prioritising the payment of the super guarantee on time.
Speak to your HLB tax consulting adviser to learn more about your SG payments.