Superannuation guarantee amnesty – limited opportunity to correct compulsory superannuation errors before heavy-handed audit activity starts

UPDATE: The Bill to introduce the superannuation guarantee amnesty lapsed when the Federal election was called on 11 April 2019. This means that the legislative protection that would have been provided by the amnesty has not been turned into law. If employers have shortfalls in the amount they have paid for compulsory superannuation, they should still consider making voluntary disclosures to the ATO to reduce the penalties. Please contact a member of our team if you would like to discuss.

On 24 May 2018, the Government introduced a 12 month superannuation guarantee amnesty. The amnesty provides incentives for businesses to self-correct historical errors in relation to compulsory superannuation.

The Minister for Revenue and Financial Services, Kelly O’Dwyer, has threatened 12 months in jail for those employers who don’t pay the compulsory superannuation that they should. The amnesty is being offered as a last chance for employers before hard-line audit activity.

There are a number of areas where the obligation to pay compulsory superannuation is not clear-cut. The most common mistakes, where well-meaning businesses have inadvertently underpaid compulsory superannuation, are set out below.

Trap one – not understanding ordinary time earnings

There should be no superannuation guarantee charge 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:

1. a workplace agreement prevails over an award, so that it is not clear what hours are ordinary and what hours are overtime
2. hours are designated as ‘overtime’ but are paid at the same rates as normal hours
3. 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 superannuation guarantee charge 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:

1. the intention of the parties, as shown in the terms and circumstances of the formation of the contract
2. who exercises control over the individual’s work
3. whether the individual operates on his or her own account or in the business of the payer – particular risk areas here include uniforms and email signatures
4. whether the individual is paid for ‘results’ contracts
5. whether the work can be delegated or subcontracted
6. who bears the commercial risk
7. who provides tools and equipment and who pays business expenses
8. 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 QRO) has concluded that individuals who were treated as contractors were actually employees.

Trap three – deemed employees

The superannuation guarantee charge legislation deems certain contractors to be employees. This applies to genuine independent contractors. The list of deemed employees includes:

1. board members
2. individuals who work under a contract that is wholly or principally for their labour
3. various MPs, members of Legislative Assemblies and other officials
4. 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
5. anyone paid to perform services in connection with the making of any film, tape or disc or of 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.

Advantages and risks with the amnesty

The amnesty offers a number of incentives. The table below sets out the advantages of the amnesty.

For the payments to be deductible, the payments must be made within the 12 month amnesty period. This means that if a payment plan extends beyond the amnesty period, the payments made after 24 May 2019 will not be deductible.

The main risk with the amnesty is making a disclosure and then being unable to pay the superannuation guarantee charge. There is no guarantee that the ATO will enter into an acceptable payment arrangement. This can have serious consequences, including that the benefits of the amnesty will not apply. The business may then be insolvent if it cannot pay its debts as and when they become due and payable.

Qualifying for the amnesty and identifying risks

To qualify for the amnesty, the disclosure must:

• be made before 24 May 2019
• contain information that has not previously been disclosed to the ATO
• be made in the approved form, which will generally include the super guarantee charge statement
• relate to the March 2018 and earlier quarters – quarters within the amnesty period are not eligible for the amnesty
• be made before the ATO advises of any review or audit of super guarantee charge obligations (commonly referred to as an ‘employer’s obligations’ audit).

Businesses that have identified risks should take steps to remove (or reduce) those risks in the future. There are a number of options depending on the type of risk identified.

Want to know more?

If you would like to know more about the amnesty, you can contact Ellie Bailey on 07 3231 2918 to purchase a copy of a webinar that Fletch Heinemann held on 25 June 2018.

Alternatively, please contact a member of our team if you would like to discuss.