An estimated A$2.3 billion in superannuation is tangled and unpaid in the Australian system. Here’s how to keep track of your crucial lifelong investment.
By Gary Anders
Australia’s superannuation system, largely underpinned by compulsory payments from employers to their workers, has been the cornerstone of the federal government’s retirement savings framework for almost 30 years.
Under the Superannuation Guarantee (SG), all employers must pay 9.5 per cent of an employee’s gross wages, excluding overtime and expenses, into an employee’s registered super fund of choice.
Our super industry is a juggernaut, and sector assets under management are growing at astronomical rates.
As at the start of 2020 there was close to A$3 trillion in superannuation savings under management, spread across retail, industry, public sector, corporate and private self-managed super funds.
Inflows are increasing by billions of dollars a year and will continue to grow. Based on industry forecasts, total superannuation assets could exceed A$6 trillion within a decade, and A$10 trillion by 2040.
Yet, despite its huge success, there are still a number of significant holes in the super system that are yet to be fully plugged.
Calculating Australia’s unpaid super
One of them is around unpaid super, where employees have not received their rightful SG entitlements over time. How much is actually out there in unpaid super is open to debate.
The Australian Taxation Office (ATO) has calculated, based on its data and investigations, that there is currently about A$2.3 billion in detected unpaid super, equal to 3.9 per cent of total outstanding SG payments.
However, that number is well below an estimate published by Industry Super Australia (ISA), the umbrella body for dozens of industry superannuation funds. The ISA puts the total unpaid super figure at close to A$6 billion, well over double the ATO’s figure.
It believes 2.85 million Australians have been “short-changed” on their super.
In a scathing report, based on 2016-2017 ATO data and other adjusted calculations, the ISA claimed: “The savings gap between Australians robbed of their super by rogue employers and those workers paid correctly has blown out by 25 per cent in just three years.”
Part of the unpaid super problem previously stemmed from salary sacrificing arrangements. These enable employees to nominate to have part of their gross salary paid into their super account as concessional contributions.
The problem was, some employers were counting their employees’ pre-tax contributions as part of the company’s own 9.5 per cent SG payment obligations and paying super only on the reduced salary amount.
The ISA estimates that A$1.5 billion of unpaid super fell into this salary sacrificing basket.
That corporate loophole has now been closed off; effective from 1 January this year all employers must now pay super on an employee’s gross rate of pay, including on any salary that has been sacrificed.
Super entitlements: The ATO is watching
John Ford, ATO assistant commissioner, explains that the ATO only gets involved in the mandatory SG system when it discovers employees have not been paid their super entitlements.
“Pleasingly, what we’ve seen is that the vast majority of that system operates effectively, and to a large extent we see employers paying that money on time to their employees’ fund of choice,” he says.
A big step forward for the tax regulator has been the introduction of Single Touch Payroll event reporting, whereby the ATO can track SG liabilities on an almost real-time basis directly from a company’s payroll system.
The ATO can then match that data in a relatively short period against the super amounts actually paid by the company into every employee’s chosen superannuation account.
“So, we have the front and the back end of the system in terms of being able to say, this is what an employer has said was due, and then actually confirming that payment was made,” Ford says.
“That’s what gives us a real degree of confidence from the outset that this is a system that in the majority of cases is working well.
“Seventy per cent of employers have now onboarded to Single Touch Payroll. That gives us a coverage of 12 million employees, and by 30 June the vast majority, other than some small groups of closely held employers, will be part of the Single Touch Payroll reporting regime.”
Education and other actions
Ford notes that when the ATO does detect an employer is underpaying super, in most cases it will first approach them to provide education, advice and guidance.
“We’ve started looking at that [payroll] data and using it prudently to identify areas where we think employers need some support and education, and more broadly where we think the ATO needs to take some action,” he says.
In October last year the ATO sent out its first range of written notices to about 2000 employers where it had identified that, although they were paying the right SG payment amounts, they were paying employees late.
All SG super payments must be paid to complying funds by set quarterly dates.
“We’ve seen a good response to that, and will now be following that through to make sure those employers are moving more to actually paying on time,” Ford says.
The ATO also has taken action against employers that haven’t made super payments. In 2018-2019 it contacted 22,000 employers and either reviewed or audited their compliance with the SG, raising A$805 million against those employers.
From July to December in 2019 the ATO also issued 2000 directed penalty notices requiring the director of an incorporated entity to become liable for the SG rather than the entity itself. The penalty notices were in relation to 1000 companies and raised a combined total of about A$130 million.
The ATO also now has the power to direct an individual to undertake education around their SG obligations. Those individuals must sit a test and pass it, and if they don’t the ATO can escalate its approach with them in terms of fines.
The usual suspects
The ATO’s analysis shows that super non-compliance does occur across employer groups, but a larger proportion occurs in certain sectors.
These include areas such as hospitality (cafes and restaurants), hotels, retail, particularly specialty stores, sub-contractors in building and construction, and building-related professional services firms such as architects.
This is enabling the ATO to tailor its approaches in terms of supporting, educating and taking action when necessary on a more targeted and specific basis. Part of this also dovetails into the work being done by the government-established Black Economy Taskforce.
“Over the last period of years, we’ve been given a range of increased tools from government – integrity measures. One of those is the ability to disclose to employees whether their employer has paid their super,” Ford says.
“So, prudently and carefully, we are now starting where we get a complaint from one employee that they haven’t received their Superannuation Guarantee, we’re contacting other employees for that employer and advising them what action we’ve taken.”
Employees can now log in through ATO online and see how much SG their employer has said they were going to pay to their fund and cross reference that to what was actually paid into their fund.
Problems in payroll
Yet, there are other unresolved unpaid super issues that may be lying dormant within the inner financial workings of many corporations, and they may not necessarily surface for a long time.
These will be in the form of undetected wage coding errors in payroll systems, in which employees may not be receiving their full super entitlements because their SG payments are being incorrectly calculated.
Rohan Geddes, national leader payroll consulting process at PwC, says determining unpaid super is not just a matter of taking the wage number from a balance sheet and multiplying it by 9.5 per cent.
For example, the SG is capped so that only wages up to A$55,270 per quarter attract compulsory payments. In addition, not all the amounts paid to an employee, such as overtime, are subject to super. Super is calculated on ordinary time earnings.
“When we work with employers on it, one of the things we recommend as good governance is to go through and do a review of your wage codes on a regular basis,” Geddes says.
“We get a printout of the list and work out what’s been coded as superannuation and what hasn’t, and then look for inadvertent errors such as items that have been hard coded for an amount of superannuation when it should be a percentage. It’s a line-by-line analysis.”
Geddes points out that payroll software will pay what it’s been configured to pay, and there are instances where a mistake could have been made a long time ago.
“Unfortunately, small mistakes and a large workforce over a long period of time equal a big number.
“I think what’s showing at the moment is that every employer needs to look at their payroll functions and systems and take a deeper dive into what’s there.
“Payroll, which manages what’s often the largest expense on a company’s books, hasn’t historically had that continuous improvement focus around it, which manifests itself in lack of training, lack of resources, and a lack of detailed reviews.”
More changes required to superannuation
ISA’s chief executive, Bernie Dean, says that, “loose laws and regulation, and the fact that super is only legally required to be paid into a worker’s account quarterly”, make it easier for some employers to do the wrong thing.
“These rogue employers simply hang on to some, or all, of their workers’ super, putting the money back into their business rather than into their workers’ super accounts.
Dean says unpaid super blasts a hole in workers’ savings, making a huge difference to their quality of life in retirement.
While most bosses are doing the right thing, some are getting away with daylight robbery.
“The only way to stop a third of Australia’s workforce having their super stolen is for the parliament to change the law and make super payable on pay day,” Dean says.
“That way, a worker can have confidence that every time their salary goes into their bank account, their super is getting paid into their super account.”