Mandatory employer contributions are the foundation of the superannuation system and there have been many changes announced in recent months which will affect employers' obligations in this regard. In this article we draw attention to some of the most significant changes for employers.
While there has been much commentary on what trustees will have to do to comply with the Stronger Super reforms,1 we would like to highlight the things that employers will have to do. Given the legislative timeline, employers should begin addressing these issues now.
There will be exemptions to the MySuper requirement for employers who satisfy their SG Act obligations by making contributions to defined benefit funds for employees with defined benefit entitlements.
Although the Government's original position was that there would be only one MySuper product available in each fund, some flexibility is now contemplated for employers who want to negotiate particular arrangements with a superannuation provider. For example:
- In recognition that there may be administrative efficiencies in dealing with some employers that warrant a lower administration fee, employers will be able to negotiate with the trustee to obtain a discounted administration fee for their employees.
- A MySuper trustee will be able to offer "large employers" (those employers who have more than 500 employees in the fund) a MySuper product that is tailored to the needs of the particular workforce, in terms of options, benefits and facilities.
The details are still to come.
“SuperStream” is the name for a broad-ranging suite of reforms designed to enhance the “back office” of superannuation.
As the first step in the back office process, employers make contributions to superannuation funds. Quite a number of the detailed reforms have implications for employers’ processes for paying superannuation contributions: both payroll payment processes and employee reporting processes.
Data and e-commerce standards
Broadly, the SuperStream reforms will involve the employer's adoption of data and e-commerce standards to effect a more automated processing of contributions so that employees will have contributions allocated to their superannuation accounts more quickly and accurately, including the following:
- employers must provide information to the fund about employees in a standard electronic format; and
- employers must send contributions to the fund in a standard electronic format.
In terms of timing for the new processes to become compulsory, the Government has recognised a distinction between “large and medium” and “small” employers (the definitions of which in this context are still to be determined).
For large and medium employers, the data standards and use of e-commerce will become optional from July 2013, and compulsory from July 2014. For small employers, it is proposed that the requirements will become compulsory from July 2015, but this is subject to further consultation on the impact of the changes.
Additional employee communications
A final aspect of the SuperStream proposals of importance to employers involves the employer's communication of regular information to employees about the employer’s superannuation contributions. Under the present law, the Government has stated that employees do not always receive “good or timely information” about their employer’s contributions.
Under a package related to SuperStream but badged as “Securing Super”, the Government plans to legislate as follows:
- From 1 July 2012, employers will be required to report on payslips an “expected payment on or before” date, in addition to reporting an employee’s superannuation entitlements which have accrued during the pay period.
The “expected payment on or before” date may be the date on which quarterly SG Act contributions are due, or another date which may be required under a workplace agreement or award.
- From 1 July 2013, payslips will also need to report actual contributions paid (rather than just accrued contributions), including the details of the fund to which the contributions have been paid.
To complete the flow of information to employees and to allow them to verify the contribution information received from employers, the relevant trustee will be required to issue regular member statements as to whether the fund has received any superannuation contributions for the relevant period.
SUPERANNUATION GUARANTEE CHANGES
Historic legislation was introduced into Parliament on 2 November 2011 to increase the level of Superannuation Guarantee contributions from 9% of "ordinary time earnings" to 12%5.
In addition to increasing the level of SG Act contributions to 12%, the Bill also proposes to remove the age limit on SG contributions (presently, contributions are not required for an employee who is aged 70 or more).
Each of these measures is intended to commence on 1 July 2013.
The following table indicates the schedule of increases in the level of SG Act contributions each year, starting with a 0.25% increase on 1 July 2013 and reaching the 12% level by 1 July 2019.
|Year starting on
1 July 2013
| Year starting on
1 July 2014
| Year starting on
1 July 2015
| Year starting on
1 July 2016
| Year starting on
1 July 2017
|Year starting on
1 July 2018
|Year starting on or
after 1 July 2019
If the Bill is passed, employers will need to make sure that their payroll systems are configured to remit the correct increased contributions to the correct superannuation fund. This increase may have implications for employment agreements and remuneration packages and any consequential changes in this regard will also need to be considered and implemented.
Employers who contribute to defined benefit superannuation funds may need to seek particular advice about the legislation's implications for them.
The next several months will be very busy for all concerned with the superannuation industry.
Employers need to start now in assessing the impact of these changes and, in particular, be aware of the following dates (which do not give much lead-time):
- by 1 October 2013, SG Act contributions generally will only be able to be made to a MySuper product or to a fund specifically chosen by the employee;
- all existing super fund arrangements should be checked early in 2013 to ensure that compliance with the new rules can be achieved by 1 October;
- as early as 1 July 2012, new processes and employee communication requirements will be operational under the SuperStream reforms; and
- from 1 July 2013, the increased level of Superannuation Guarantee contributions might affect employees' remuneration packages and employment arrangements and amendments might be necessary.
Business of being a trustee: APRA and outsourcing
The "outsourcing" operating standard is set out in regulation 4.16 of the Superannuation Industry (Supervision) Regulations 1994 and applies to all RSE licensees (outsourcing standard). The outsourcing standard generally focuses on the content of the relevant contracts and requires a trustee to document "material outsourcing agreements" in a particular way.
The outsourcing standard has been around since 2004 and, apart from initial debates about which types of activities constituted a "material business activity", the standard has been relatively uncontroversial. Along the way, APRA has provided some guidance in the form of Superannuation Guidance Note 130.1 (and the concomitant FAQs). SGN 130.1 has not been updated substantially since it was first released in July 2004.
15 November 2011 letter and fund promoters
In a recent substantive development, APRA issued a letter to trustees (dated 15 November 2011) emphasising that activities of "fund promoters" are caught by the outsourcing standard. Perhaps this letter was intended to make clear that APRA regards promotion of the fund to be a material business activity as the letter states that fund promotion has the potential to
…significantly impact the business operations, reputation, rate of return, profitability and/or net assets of an RSE or RSE licensee….
In the letter, APRA explains that "fund promotion" clearly includes product design or marketing services but that the term might also catch other trustee activities. APRA's message is that a trustee must test all its contractual arrangements against the outsourcing standard's definition of "material business activity" and should not assume that only custodial and administrative services are covered.
APRA states that it is aware of "numerous" examples where trustee agreements with fund promoters did not comply with the outsourcing standard and that it expected trustees to correct the errors and ensure compliance immediately.
APRA's prudential standards Discussion Paper
In its 15 November letter, APRA further stated that the approach outlined
…is also consistent with the theme of the proposed robust governance standards as set out in APRA's discussion paper Prudential Standards for Superannuation, which was released by APRA on 28 September 2011.
The APRA Prudential Standards Discussion Paper (which was mentioned in our 10 October 2011 Superannuation Update eNewsletter) states that, as a starting point, the superannuation prudential standard regarding outsourcing would be based on Prudential Standard CPS 231 (which is the prudential standard that applies to banks and insurance companies). APRA also emphasises that it regards the management of outsourcing to be part of the trustee's risk management function and that the prudential standard will be designed to ensure that the trustee has a greater understanding of the risks of outsourcing, such as:
… the circumstances of the outsourced service providers, including capital/financial resources, adequacy of insurance arrangements, data integrity controls and the adequacy of governance and risk management frameworks….
While the Discussion Paper doesn't indicate that there will be any substantive differences from SIS Regulation 4.16 in the prescribed content for an outsourcing agreement, there are changes proposed so that the trustee's process for, and policy towards, outsourcing are articulated. The more significant new matters which the Paper proposes to include in the prudential standard are:
- an RSE licensee must have an outsourcing policy that addresses the material business activities of the trustee but may address other non-material outsourced activities as well; and
- the policy must:
- demonstrate how the trustee remains accountable for each material business activity that is outsourced;
- demonstrate the trustee's due diligence considerations in relation to each outsourced provider;
- include a detailed framework for managing the outsourcing of material business activities, both new arrangements and monitoring of existing arrangements; and
- address conflicts issues such as using a related party service provider and having directors who sit on the board of both the RSE licensee and the service provider.
The Discussion Paper indicates that the outsourcing standard will be removed from SIS Regulation 4.16 (and that Regulation will be withdrawn) and will be set out only in the new APRA prudential standard. As you can glean from the discussion above, the APRA prudential standard will be more detailed than SIS Regulation 4.16 and will set out requirements in addition to the content of the outsourcing agreement. The standard will, in fact, prescribe matters which are more in the nature of what is contained in SGN 130.1 (which will also be withdrawn).
As described in our October Superannuation Update, when a prudential standard is promulgated, it will become enforceable as a matter of law. In the case of superannuation, this means that matters which were previously not enforceable, such as those matters presently covered in SGN 130.1, will now become law. The industry should be aware that APRA prudential standards will be much more than a "suggestion" to the trustee as to what constitutes best practice.
The Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 was introduced on 16 February 2012 and, when passed, will confer prudential standards-making power on APRA.
Case note: Natalie Newton (T/A Combined Care for the Elderly) and Commissioner of Taxation
The issue of when, for the purposes of the employer's obligation under the SG Act, an individual engaged to perform work will be considered an "employee" has been considered again in the recent case of Natalie Newton (trading as Combined Care for the Elderly) and Commissioner of Taxation.
This case is of particular interest because, among other things, it considers the "work of domestic or private nature" exemption available to employers under section 12(11) of the SG Act.
The relevant background to the case is as follows:
- Ms Newton owned and ran a business during the period July 2010 to December 2010:
…that provided what are described as community support services. Typically the clients of the business were disabled, infirm, elderly or otherwise in need of physical assistance in their homes. The services provided to them included cooking, cleaning, shopping, showering, dressing and general household duties. The services were not physically or personally provided by [Ms Newton], but by workers on whom [Ms Newton] could call when a client placed a request for assistance.
- Ms Newton's business was described as that of an "intermediary". That is, calls were received from members of the community when they required assistance in their home, and Ms Newton would then arrange for someone from her list of workers to take on the assignment.
- The Commissioner of Taxation determined that Ms Newton was an employer, the workers were her employees, she did not make the requisite SG Act contributions in respect of those "employees" and, consequently, she was liable to pay the SG charge.
- Ms Newton lodged an objection against the Commissioner's assessment in this regard, which was disallowed by the Commissioner.
- Ms Newton appealed the Commissioner's disallowance of her objection to the Administrative Appeals Tribunal (AAT).
The first AAT decision – Care Provider and Commissioner of Taxation  AATA 475
In the first AAT decision, Senior Member Frost found in favour of Ms Newton on the basis of the exemption under section 12(11) of the SG Act which provides that:
A person who is paid to do work wholly or principally of a domestic or private nature for not more than 30 hours per week is not regarded as an employee in relation to that work.
The substance of the Commissioner's position was that:
In the context of the facts of this matter, it is submitted that while the work done for the end-user may be objectively viewed to be of a domestic or private nature that of itself cannot determine the nature of the work done for the Applicant. The work done when viewed from the Applicant’s point of view (as the payer) was labour provided in the course of the Applicant’s business and not work done for the Applicant personally or work that related to the Applicant’s home, household affairs or family organisation.
However, Senior Member Frost held that the Commissioner had misconstrued section 12(11) and that ultimately an examination of the nature of the work being performed by the person is what is required in determining whether section 12(11) applies.
The Commissioner appealed this decision to the Federal Court of Australia.
The Federal Court decision – Commissioner of Taxation v Newton  FCA 1440
The Federal Court was asked to interpret and to apply SG Act section 12(11). The Court held that it was necessary to consider that question having regard to the purposes of the provision and with the whole SG Act in mind. The Court also held that it was necessary to consider the issue in context, which included such things as "the mischief that one may discern, by legitimate means, the [Act] was intended to remedy."
In submissions to the Court, much emphasis was placed on the following 2 particular points :
- the distinction between doing work of the relevant nature directly for a private householder, compared to being engaged by an intermediary and paid for work done in the course of the intermediary's business; and
- the performance of the work across various households (in the context of the 30 hours per work threshold).
The Court held that, on balance, there was an error of law on the part of the AAT in construing section 12(11) of the SG Act. Accordingly, the Court allowed the appeal and remitted the matter to the AAT for further consideration in accordance with the law and the Court's reasons.
The second AAT decision
Senior Member Frost again considered whether the workers were employees of Ms Newton in the relevant sense, but this time having regard to the more familiar tests of whether they were employees within the "ordinary" meaning (section 12(1) of the SG Act)
or whether they worked "under a contract that [was] wholly or principally for the labour of the person" (section 12(3) of the SG Act).