On 7 September 2020, the superannuation guarantee amnesty period ended.
Employers that have underpaid compulsory superannuation up to 31 March 2018, and who did not take advantage of the amnesty, will now generally be subject to a base penalty of between 100% and 200% of the superannuation guarantee charge (SGC).
There is no limitation period for when the ATO can issue original assessments for SGC.
The ATO previously had a broad discretion to remit penalties. However, the legislation now generally prevents the ATO from remitting penalties below 100% of the employer's SGC for quarters that were covered by the amnesty.
One exception, which allows the ATO to remit penalties below 100%, is where the employer makes a voluntary disclosure.
What are the common mistakes for underpaying compulsory superannuation?
We see many cases where employers attempt to comply with their compulsory superannuation obligations but are caught by complexities in the law. The minimum 100% penalty for those historical quarters will be a harsh result in these cases.
Employers should check they are not caught by one of the traps below.
Trap one – not understanding ordinary time earnings
There should be no SGC when compulsory superannuation is paid on time, at the correct rate, on ‘ordinary time earnings'.
‘Ordinary time earnings' means the earnings in respect of the ordinary hours of work. The difficulty in some cases is assessing what hours of work are ‘ordinary'. Overtime is generally not ‘ordinary hours', but complications can arise when:
- a workplace agreement prevails over an award, so that it is not clear what hours are ordinary and what hours are overtime
- hours are designated as ‘overtime' but are paid at the same rates as normal hours
- there is no award and no agreement, in which case all hours may be ‘ordinary hours'.
The worst cases we have seen are businesses paying compulsory superannuation on 38 hours per week, when in fact individuals were working more than 38 hours and all hours were ‘ordinary hours'. A mistake like this, multiplied across a workforce, can produce a significant SGC bill.
Trap two – contractors who are actually employees
Whether an individual is an employee or independent contractor continues to be the subject of many disputes.
The ATO provides a list of factors that they consider when assessing whether an individual is an employee or independent contractor. These factors are:
- the intention of the parties, as shown in the terms and circumstances of the formation of the contract
- who exercises control over the individual's work
- whether the individual operates on his or her own account or in the business of the payer – particular risk areas include uniforms and email signatures
- whether the individual is paid for ‘results' contracts
- whether the work can be delegated or subcontracted
- who bears the commercial risk
- who provides tools and equipment and who pays business expenses
- other indicators, such as leave.
The list is a helpful overview of the factors to consider. However, applying these factors to a particular individual's circumstances can be much more difficult. Extreme care should be taken when using the ATO's online calculator. While it generally produces the correct answer in clear-cut cases, it does not properly analyse border-line cases. It is also not binding.
There has also been a recent trend in the case law where a further test has been introduced: whether the individual is carrying on a business. This is a different test compared to the ATO's consideration of the factors (above) about whether the individual is acting on their own account. On the business test, if an individual is not carrying on a business, they are an employee.
We have seen a number of unfortunate cases where the ATO (or OSR) has concluded that individuals who were treated as contractors were actually employees.
Trap three – deemed employees
SGC legislation deems certain contractors to be employees. This applies to genuine independent contractors.
The list of deemed employees includes:
- board members
- individuals who work under a contract that is wholly or principally for their labour
- various MPs, members of legislative assemblies and other officials
- anyone paid to perform or present any music, play, dance, entertainment, sport, display or promotional activity – and anyone paid to provide services in connection with one of those
- anyone paid to perform services in connection with the making of any film, tape or disc or any television or radio broadcast.
For individuals providing professional services, the issue is often whether they are being paid wholly or principally for their labour.
How much will my penalty be remitted if I make a voluntary disclosure for historical quarters?
For historical quarters, the legislation requires that the employer makes a voluntary disclosure to the ATO. This must be done before the ATO informs the employer that it will be examining the employer's compliance for a particular quarter. If this is not done, the ATO does not have the power to remit the penalty below 100%.
If the employer does make a voluntary disclosure, the effect is that the ATO has the power to remit the penalty below 100%.
In assessing the base penalty rate, the ATO will first consider whether the voluntary disclosure was made:
- before any ATO contact at all – in which case the base penalty will be 20% of the SGC, or
- after initial ATO contact (e.g. a reminder letter) but before any ATO compliance action – in which case the base penalty will be 40% of the SGC.
The ATO will then decide whether to increase or decrease the base penalty rate. Mitigating facts and circumstances that the ATO will consider when looking at whether to remit the penalty below the base penalty are listed in PS LA 2020/4:
- a key ATO system (e.g. Small Business Super Clearing House) was out or malfunctioned and the employer can demonstrate that this caused them to narrowly miss the due date for the lodgement due date
- the employer or a key employee of the employer was ill
- the employer's non-compliance with their SG obligations occurred in their first year of operation, and their principals had no previous business experience
- the employer made a voluntary disclosure of their SGC liability for a quarter and the facts indicate the shortfall arose due to an error or honest mistake
- the employer made a voluntary disclosure of their SGC liability for a quarter and the ATO is satisfied that they have addressed the issues that led to their SG shortfalls or failure to lodge SG statements
- the employer made a voluntary disclosure and their SG shortfalls are because the employer has correctly identified an individual as not being an employee under the ordinary meaning of the word, but has missed that the individual is a deemed employee because the employee is engaged wholly or principally for their labour – see trap three above
- the employer made all required contributions, but was late in paying by a small period, or
- the employer participates in a penalty relief arrangement and the ATO gives them an education direction.
These are not the only factors the ATO will take into account.
What steps should I take now?
Employers need to check that they are making the correct compulsory superannuation contributions – and that those amounts are being paid on time.
Employers should particularly check they are correctly calculating ‘ordinary time earnings', and work through all of their contractors to check they are not caught by the ‘deemed employee' provisions for compulsory superannuation purposes.
To manage the penalty risk, these steps need to be taken before any contact from the ATO.
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.