Update your superannuation practices, warns expert
28 January 2010 8:52am
Employers with outdated superannuation practices could be under-paying employees and exposing themselves to hefty fines, says Mercer's head of defined contribution consulting, Russell Mason.
Neglecting the changes introduced in the new Modern Award legislation and failing to base minimum contributions on ordinary time earnings are two traps to beware of, Mason says.
Even though the requirement that an employer's minimum nine-per-cent super contribution be based on ordinary time earnings took effect more than a year ago, Mason says some employers are yet to adjust their payments accordingly.
Previously, he explains, "if your package or total cash salary was $100,000 but you had a base salary for super purposes of $70,000, it was legal to pay the nine per cent on the base salary". Now, however, earnings such as performance bonuses, commissions and shift loadings must be included in the nine per cent calculation.
Employers that have not adjusted their payments will face significant fines and penalties if unions discover award employees are being underpaid, or when audited by the ATO, he says. "It's something you'd want to avoid, so ensuring you're paying on the right salary base is important."
Additional legislation introduced this year means employers without an enterprise agreement must now comply with the Modern Award as well. "For employers considering changing their default fund for award employees this means ensuring the selected default superannuation fund is listed in the relevant award for the employer's industry," Mason says.
Another common mistake, particularly in the case of smaller companies with limited internal resources, is paying contributions late, he says. "Not only does it cost you more to pay late, the Australian Taxation Office will be 'cracking down' on employers who fail to pay their employees' superannuation guarantee contributions on time." Late contributions will not be tax deductible and can incur penalties and administration fees from tax office levies, he warns.
While "the vast majority" of awards require employers to contribute the nine-per-cent super guarantee (SG) quarterly, there might be exceptions to the rule, Mason says. Employers should "check that their award doesn't require them to contribute monthly" or in rare cases, "to contribute more than nine per cent".
Legally SG contributions must be paid quarterly, but Mason says best practice is to make monthly contributions. This is in line with the need for all non-SG after-tax contributions to be paid monthly. "A good employer should be paying monthly just as they pay your salary, because as far as I'm concerned your superannuation is just like your salary," he says. "It's your money and so it should be paid regularly."
While some employers might be failing to pay the correct amount or within the correct time-frame, others could be contributing more than nine per cent to defined (as opposed to SG) contribution funds. "You get a lot of large multi-nationals, for instance, who used to have an old defined benefit fund; they converted it to a defined contribution and they wanted to try to get similar levels of benefits that they gave in their old scheme, so they might have decided to put in 12 per cent or 11 per cent... rather than the statutory nine per cent," he explains.
"For instance you'll often find employers in the mining industry will pay more than nine per cent, and that's a product of the competitiveness of the industry and attracting staff to, in many cases, remote locations." Mason says these employers should ask themselves the question ,"is it still valid today?"
Just because they decided to do it 10 years ago doesn't mean it's still the best method, he says. Now that many companies have moved to total salary packaging or total rent packaging, these employers "should revisit the logic as to whether it is still appropriate to make these contributions, especially for new employees joining the company."
In addition to ensuring they are meeting their legal obligations, Mason says employers can strive toward best-practice and help their employees by:
Promoting the importance of superannuation to employees - Employers should not let the poor results of 2007/08 and 2008/09 distort their employees' views of superannuation as a long-term, tax-effective retirement savings vehicle which remains a cornerstone of retirement planning in Australia. The importance of superannuation, as well as timely information, should be promoted through internal communication channels such as staff newsletters, bulletins and intranets.
Providing employees with super education - Employers play a vital role in providing superannuation education and information and this is a benefit that is highly valued by many employees. Employers who ensure their workers understand their superannuation options - including choice of fund, investment choices, retirement options and insurance options - could see employee engagement levels rise. Employers should look to their default fund to provide on-site education seminars for members, a service that most of the large public funds (including master trusts and industry funds) offer.
Only allowing licensed individuals to provide superannuation advice - While educating employees about their choices, employers should be careful not to give any superannuation advice. Recommending an investment option or providing encouragement to switch funds are two examples of what could be constituted as advice, and only those properly licensed by ASIC can give such advice to employees. In saying this, however, employers should be prepared to assist their employees with information about their default fund; this includes having a ready supply of annual reports and product disclosure statements.
Providing access to a licensed financial adviser can help employees access all the information they require and it is also a good way to boost your employee benefits offering, Mason says.
Warning employees of the new maximum concessional contribution limits - Employees could wind up paying unexpected additional tax if they're not aware of the concessional (pre-tax) and non-concessional (post-tax) contribution limits, which were halved in the 2009 Federal Budget. This is particularly important in this financial year (as the reductions have taken effect) and for high income earners who could, in some cases, effectively reach the contributions limit through their Superannuation Guarantee (SG) contributions alone. While it is ultimately the responsibility of the employee to monitor their superannuation contributions, responsible employers will provide relevant information to employees to inform them of the consequences of exceeding contribution limits, Mason says.
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