Chartered Accountants Australia and New Zealand, CPA Australia, the Institute of Public Accountants, the SMSF Association, Financial Advice Association Australia and The Tax Institute (together, the Joint Bodies) write to you as the peak professional accounting and tax practitioner bodies in Australia representing the tax profession, the superannuation sector and financial advisers. The Joint Bodies welcome the opportunity to make a submission to the Treasury in relation to the consultation paper titled ‘Securing Australians’ Superannuation’ (Consultation Paper).
In the development of this submission, we have closely consulted with members of the Joint Bodies who have specific knowledge, experience and expertise in taxation, superannuation and, specifically, the Superannuation Guarantee (SG) regime.
We set out below our responses to the issues and ideas raised in the Consultation Paper. We have limited our responses to those matters we consider are the most relevant from a tax and superannuation policy and administration perspective.
Our submission is quite technical in nature and contains a significant amount of detail. As noted throughout, the proposed change to a Payday super (PdS) model is complex and its successful implementation depends on a multitude of factors. We trust that the detail in our submission will assist the Government and relevant government agencies to better understand the underlying issues, and design the system to best achieve the underlying policy intent while being simpler, more efficient and equitable.
We would be pleased to work with the Government to further discuss the points raised in our submission. The Joint Bodies can provide the Government with access to the range of tax technical and industry experts who have contributed to our submission.
The Joint Bodies support the Government’s proposed policy of introducing PdS. However, the shift to a PdS model represents a significant departure from the current SG regime and the operation of the Superannuation Guarantee Charge (SGC). The proposed policy changes will impact a wide range of legislative provisions, employers’ compliance requirements, the onboarding of employees with an employer, payment and reporting systems and processes, services provided by intermediaries (including payroll providers, clearing houses and practitioners), and administration by the Australian Taxation Office (ATO or the Commissioner). As a result, every aspect of the policy and its impact needs to be carefully considered. Otherwise, there is a high likelihood of significant and unintended consequences that may affect employers’ ability to comply with the PdS model.
The shift to PdS provides a rare opportunity to address a range of actual and perceived shortcomings and deficiencies in the current system to:
- ensure the PdS model operates to encourage employers to voluntarily rectify non-payment, underpayment or late payment of employees’ SG entitlements;
- more equitably compensate employees’ superannuation accounts for the lost earnings on unpaid SG amounts without disproportionately punishing employers;
- reduce compliance costs; and
- ensure the PdS model is more consistent with other areas of taxation and superannuation legislation, and other laws.
This will require an overhaul and re-design of existing components of the SG regime. When designing the PdS model, the Joint Bodies are of the view that the Government should consider a range of factors including, but not limited to:
- ensuring PdS is implemented in a manner that reduces compliance costs, utilises existing reporting mechanisms and avoids the duplication of efforts;
- updating the SGC so it is simpler, more accurately compensates employees’ superannuation accounts for the loss in earnings for the duration their SG contributions are unpaid, and re-designs the penalty component;
- ensuring PdS imposes penalties on employers for non-compliance on a proportionate basis so those employers who make an honest mistake are treated less harshly than those who engage in egregious non-payment of their SG obligations;
- ensuring PdS incentivises employers to come forward and report SG shortfalls;
- providing for an appropriate transitional mechanism to allow employers, self-managed superannuation funds (SMSFs) and digital service providers (DSPs) the time needed to adapt to the new requirements, including an amnesty to encourage employers to rectify historical SG shortfall amounts; and
- utilising technology to ensure that the ATO’s systems and software providers enable a successful implementation of PdS.
The ATO’s latest tax gap estimates for 2020–21 show that the net gap for Pay as you go (PAYG) withholding is 1.7% ($3.871 billion) and the SG gap is 5.1% ($3.619 billion). While the majority of employers do the right thing (almost 95% of SG payments that were due were paid), the figures show that more than $3 billion a year of superannuation remains unpaid. The difference in these tax gaps demonstrates, among other things, that the current SG regime, including the more severe penalties regime, is ineffective.
It follows that a well-designed system should appropriately penalise and seek to deter those who are non-compliant but not discourage employers from self-correcting or disincentivise voluntary disclosures of SG shortfalls. The size of the SG tax gap illustrates that more is needed to encourage employers to meet their obligations to close the gap.
The SGC regime was designed and enacted in a completely different era. Its archaic legacy design is no longer fit for our times, nor fit for the future. 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 therefore generate earnings on those contributions earlier and their retirement savings will benefit from the compounding effect of this over time.
Our detailed response is contained in Appendix A. We have included in Appendix B worked examples showing the difference in outcomes under the current SGC regime and our proposed SGC model.