Workers cheated out of $4.6 billion in superannuation

Australian Financial Review

4 December 2016

Joanna Mather

New research suggests the underpayment of superannuation entitlements reached $4.6 billion in 2013-14, a figure that includes $1 billion lost to employees who use salary sacrifice arrangements to try to boost their retirement savings.

Unscrupulous employers, sham contracting and the cash economy were responsible for the underpayment of $3.6 billion, said an Industry Super

Australia report based on Tax Office data.

The problem is compounded by a “loophole” that allows employers to pay less super into the accounts of employees who make voluntary contributions using salary sacrifice, the report said.

If somebody chooses to salary sacrifice $1000 a month, for example, an employer can, in the absence of a contract stipulating otherwise, reduce their contribution by the same amount.

The employer saves $1000 but the employee is no better off in retirement.

The report says $1 billion of salary sacrificed money was used by employers to meet their minimum obligations in this way in 2013-14.

ISA, which represents union-aligned funds, is calling for an end to the salary sacrifice loophole, as well as a provision that gives employers four months between when super contribution amounts appear on pay slips and the money actually lands in a fund.

“Without action, unpaid super and lost earnings will reach $66 billion by 2024,” the report said.

Missing out

“Younger workers, low-income earners and workers in the construction, hospitality and cleaning industries were most likely to miss out on superannuation.

“On average, affected workers missed out on $1489 or almost four months’ of superannuation contributions.”

But employees in the professions, on higher incomes and in older age brackets are also affected because they are the ones who tend to use salary sacrifice to make extra super contributions.

“Employees do not understand that if they salary sacrifice into super, their employer can use this to meet their SG [superannuation guarantee] obligation,” the report said.

“The key motivation for an employee to make additional salary sacrifice contributions is to boost their retirement savings. This loophole should be closed immediately.”

The Super Guarantee (Administration) Act Super requires a certain proportion of “ordinary time earnings” be paid into super each quarter.

In 2013-14 – the latest year for which statistics are publicly available and therefore the year included in the report – the guarantee was 9.25 per cent. It is now 9.5 per cent.

The report also says the ATO should get more money for compliance activity and ISA will lobby for its members – super funds – to be allowed to recover unpaid super on behalf of their members.

Where employers do not pay adequate SG contributions to the employee’s nominated fund on time, they may be liable for a SG charge.

In 2014-15 the ATO raised $735 million in SG charges and collected $379 million. Last week the Senate agreed to hold an inquiry into unpaid super.

“Despite improvements in their handling, the ATO remains insufficiently resourced to effectively investigate reports of non-compliance,” the report said.

In a report last year, the Auditor-General noted that that the ATO only collected about half of the super non-payments it identified.

“The ATO’s own internal risk assessment indicates that as many as 11 to 20 per cent of employers could be non-compliant with their SG obligations, and that non-compliance is ‘endemic’, especially in small businesses and industries where a large number of cash transactions and contracting arrangements occur,” the Auditor-General said.

“Importantly, this non-compliance primarily affects lower paid employees and those are the most likely to rely on the age pension in later years.”

The ISA report incorporates work by Tria Investment Partners that found 277,000 workers in the cash economy did not receive their full super entitlement in 2014, a loss of $800 million.