Pay Your Super on Time or Pay the Consequences

This is a reminder that employers need to pay their super guarantee obligations on time otherwise, they could be up for significant penalties.  Super guarantee contributions must be made to a complying super fund or retirement savings account within 28 days after the end of the quarter in which the liability arose (see table below).

^{1 – some superannuation funds require monthly contributions.}

Employers who fail to pay the super guarantee contributions by the due date are required to lodge a Super Guarantee Charge Statement and pay the Super Guarantee Charge (which is not tax-deductible).  This obligation remains even if all of the super guarantee contributions were made only a couple of days late.

The penalties for late payment of super guarantee contributions are quite severe and should be avoided at all costs.  There are essentially three kickers to the Super Guarantee Charge:

• the calculation of the super guarantee shortfall amount;
• how interest is calculated on those amounts; and
• the administration fee of $20 per employee per quarter

Shortfall Amount

Normally the super guarantee contributions are calculated on the employees’ Ordinary Times Earnings (i.e. excluding overtime), however when their super guarantee contributions are paid late there is a recalculation of the super guarantee contribution amount.  Super is now payable on the employee’s total earnings (i.e. inclusive of overtime).  This could result in a significant amount of additional super payable if the employees have been working overtime.

Interest Calculation

Under the current Super Guarantee system interest accrues (currently at 10%) on the super guarantee shortfall amount from the start of the quarter that the super guarantee wasn’t paid on time through to the date that the Super Guarantee Charge Statement is lodged and the Super Guarantee Charge is paid.  This is probably the most brutal of the penalties for late payment of an employee’s super guarantee contributions:

• interest is calculated from the start of the quarter that the super guarantee contributions weren’t paid on time, and as such an employer could end up paying interest for a period prior to a liability actually arising.  For example, if an employee commenced with a business on 15 June 2020 and their super guarantee contributions were paid late, interest would be calculated from 1 April 2020, some 2½ months prior to them commencing employment.  The anomaly doesn’t just apply to new employees but could also apply to employees earning less than $450 in the first two months of the quarter (i.e. where there is no requirement for super guarantee contributions to be made).
  
  This is akin to paying the bank interest on a mortgage prior to taking out the loan.

• interest is calculated up until the time that the Super Guarantee Charge Statement is lodged and the Super Guarantee Charge paid, and as such interest will still accrue even where the employee super guarantee contributions has been paid, albeit late.  For example if an employer pays the super guarantee contributions for the June quarter on 30 July (2 days late), interest will accrue from 1 April through until the date that the employer lodges the Super Guarantee Charge Statement and pays the Super Guarantee Charge, which in some instances could be years later.
  
  Using our home loan analogy this would be akin to paying interest to the bank after you repaid your loan.

Administration Charge

The administration fee of $20 per employee per quarter may not sound like much, however if you pay 30 employees late, even by 1 day, the administration fee becomes $600.  This is exacerbated if you are late for a number of quarters.

Late Lodgement Penalties

As if the above penalties weren’t enough to get employers to pay their super guarantee contributions on time, there are penalties if the employer fails to lodge a Super Guarantee Statement within the required time frame.  The Tax Office can impose penalties of up to 200% of the Super Guarantee Charge payable for late lodgement of the Super Guarantee Statement.  The following table sets out the reporting deadlines for lodgement of the Super Guarantee Contribution Statement and payment of the Super Guarantee Charge

Denial of Tax Deduction

Any Super Guarantee Charge payments are not deductible to the employer.  As the late paid super guarantee contributions form part of the Super Guarantee Charge the contributions themselves would be non-deductible to the employer in addition to the penalties imposed.  Paying the super guarantee contributions one day late could mean that an employer isn’t entitled to a tax deduction for those contributions.

Directors Personally Liable

Directors of a company that fails to meet a Super Guarantee Charge liability in full by the due date cannot hide behind the corporate veil and can become personally liable for a penalty equal to the unpaid liability.

Getting Caught Paying Late

Superannuation funds now report to the Tax Office when they receive super guarantee contributions for employees (including working owners).  The Tax Office is using this information, as well as the information reported through the Single Touch Payroll system, to identify employees who have paid some or all of their super contributions late or haven’t paid the right amount by the due dates.  With this data, matching it is only a matter of when an employer will be caught, not if. 

We are already receiving letters from the Tax Office advising that they have identified employers who may have a Super Guarantee Charge obligation, so it is essential that employers pay their super guarantee obligations on time.

Example of Impact Late Payment

Mr Slate runs a small quarry company.  On 1 April 2017, the company employed 9 workers who each earned $12,500 per month, of which $2,500 was overtime.  In May 2017, the company hired Fred and for May 2017, he earned $5,000 with no overtime & for June 2017, he earned $12,500 which included $2,500 overtime.  Mr Slate paid the super guarantee contributions on 4 August 2017.  Whilst Mr Slate was aware that he had paid the super guarantee contributions late, he didn’t realise that he was required to lodge a Super Guarantee Statement and pay the Super Guarantee Charge.  In October 2020, Mr Slate was subject to a super guarantee audit where it was discovered that he was late in paying super guarantee contributions for the June 2017 quarter.  Mr Slate was hit with a Super Guarantee Charge which he paid on 1 November 2020.

The total cost to Mr Slate for paying the super guarantee contributions late by 1 week was $32,752, excluding any penalties that the Tax Office may impose for late lodgement of the Super Guarantee Statement.

The above example shows that the cost of not paying your super guarantee contributions on time can be more than contributions themselves.  As such it is imperative that all super guarantee contributions are lodged on time.

Some Common Mistakes

Unfortunately, the Super Guarantee Charge can apply irrespective of whether the failure to make the super guarantee contributions on time was deliberate avoidance, inadvertent mistake or a misunderstanding of the complex legislation.  The Commission also has no discretion to reduce the amount of the Super Guarantee Charge.

Following are some of the common errors that we see when clients have undergone Super Guarantee audits:

• waiting until the end of the financial year to make super contributions for working directors.  If directors receive a salary or wage throughout the year then super guarantee contributions are required to be made throughout the year.  Where there are working directors we recommend that quarterly contributions be made so as to avoid the imposition of the Super Guarantee Charge, or if cash flows permit making a payment at the beginning of the year to cover the entire year’s contributions.

• misinterpretation of whether an individual is a contractor or an employee for super guarantee purposes.  Careful consideration must be made where you engage with individuals on a contract basis and it is not sufficient for the contractor to sign a waiver to super guarantee contributions.

• incorrect set up of employees in the payroll system.  Some systems require the employees to be marked as to how super guarantee contributions are to be made.  Where new employees commence we recommend that the calculation of the super guarantee contributions is checked to avoid the imposition of the Super Guarantee Charge.

• incorrect set up of pay items in the payroll system.  Some systems require a pay item be marked as to whether it is to be included in the calculation of the super guarantee contributions.  Where new pay items are added we recommend that when the first pay run using this new pay item is made that the calculation of the super guarantee contributions is checked to avoid the imposition of the Super Guarantee Charge.

• misinterpretation of what constitutes Ordinary Times Earnings resulting in underpaid super guarantee contributions.  Some employers don’t fully understand what payments fall into Ordinary Times Earnings and ultimately what the super guarantee contributions are calculated on.  To assist clients we have created a checklist of common pay items and whether they fall into the definition of Ordinary Times Earnings.

For more articles, see our Summer Bulletin