Superannuation contribution - is time on your side?

Andrew Biviano considers employer superannuation contribution deadlines and explains how to successfully maximise super potential.

Superannuation can be an effective way to save for retirement due to tax concessions, compulsory Superannuation Guarantee (SG) and the simplicity of making extra contributions.

These contributions combined with a member’s account balance and investment earnings from carefully selected investments form the majority of many peoples’ retirement nest egg.

However, to successfully achieve this outcome a number of potential issues should be considered. Not doing so may affect the acceptance of a contribution, tax efficiency or the timely entitlement of a contribution.

While the acceptance and tax efficiency of a contribution is largely considered, the issue around the remittance of a contribution is not. What are the employer’s obligations when an employee directs them to make a superannuation contribution?

There are two main types of contributions an employer will remit to a superannuation fund for an employee, each with different requirements. They are:

• employer contributions; and
• member voluntary contributions.

Employer contributions

Superannuation law broadly defines an employer contribution to be one that is made by an employer for the benefit of a member who is their employee or one of their associates.

From a practical perspective, employer contributions include SG contributions, contributions made under an agreement or award and salary sacrifice contributions that form part of an ‘effective’ arrangement.

It should be noted that while SG contributions fall within the definition of an employer contribution, there are strict rules which govern a person’s eligibility, the definition of salary and wages and when a SG contribution is to be remitted.

In summary, a SG contribution is generally required for all employees who are aged 18 or above but under age 70 (increasing to age 75 from 1 July, 2013) if they earn at least $450 a month, irrespective of their employment status, which may be casual, part-time or full-time.

The law also extends the meaning of an employee to include other persons, such as board members, directors and a person who works under a contract that is wholly or principally for their labour.

It should be noted that where an employee is under age 18, SG contributions are not payable where they are part-time (employed for 30 hours per week or less).

Where SG is payable, 9 per cent of an employee’s ordinary time earnings is required to be paid within 28 days after the end of a quarter.

If an employer does not pay the required SG contributions, they will have to pay the Superannuation Guarantee Charge, which is not tax deductible to the employer. In addition, an administration charge of $20 per employee per quarter and an interest charge of 10 per cent per annum are also payable.

Importantly, the rules relating to the remittance of SG contributions do not cover other employer contributions, like salary sacrifice.

To avoid any misunderstanding, the timing of those payments should be agreed to by an employee and their employer. Ideally, this should form part of any sacrifice arrangement document along with any details of benefits that may be reduced.

Consider the case where a person contributes a large amount by way of a regular salary sacrifice arrangement. Without a definitive timeframe around the remittance of a contribution, what impact could that have on a member’s potential return?

The best-case scenario would see them remitted close to the date they were deducted, but worst case could see them remitted at the same time as SG or possibly even longer. What if an employer waited a year?

Take for example Jim, who is aged 59 on a salary of $80,000 per annum plus 9 per cent super. As Jim is over 50, his concessional contribution limit is $50,000; after deducting $7,200 for SG he can salary sacrifice a maximum of $42,800 ($3,566 per month).

Assuming an investment return of 7 per cent per annum, if this amount was contributed and remitted on the 15th of each month for the 12-month period, he would receive approximately $1,540 in interest. If on the other hand the amounts were remitted 28 days after the end of a quarter, his earnings would be approximately $1,050.

Where contributions take even longer to remit, what amount of potential earnings may be lost?

Member voluntary contributions

Unlike employer contributions, member voluntary contributions are those contributed after-tax or are those that do not form part of an effective salary sacrifice agreement.

Interestingly, superannuation law does contain rules that specify when these amounts are required to be made.

Specifically, they need to be contributed within 28 days after the month they are deducted from the employee’s salary.

A point to note is the law requires the remitting of voluntary savings to be more timely than compulsory SG amounts.

For example, if a voluntary member contribution was deducted from an employee’s salary during January, the employer is obliged to remit them to the superannuation fund before 28 February. In comparison, if the amount was an SG contribution the law does not require remittance until 28 April.

If an employer does not pay member voluntary contributions within the required timeframe, the employer could be found guilty of breaching the law and incur either a fault or a strict liability penalty.

This equates to a penalty of up to $55,000 or $27,500 respectively where the employer is a body corporate.

It is worth noting that the issues around the various remittance dates were raised as part of Ken Henry’s Super System Review.

The Government’s response (16 December, 2010) noted the issues and commented that they would be considered further in consultation with relevant parties.

Until then, regular client reviews allow contributions to be tracked to ensure a client’s retirement strategy is not being undermined due to late running contributions.

Andrew Biviano is technical services and paraplanning manager at Fiducian Portfolio Services.