Super loophole now a black hole as politicians do little

Super loophole now a black hole as politicians do little

THE Labor Party often points to the super guarantee system to establish its credentials when it comes to maximising Australians’ retirement benefits. In fact, the lack of action by all Labor governments since the introduction of the system to fix a big problem with its design proves the opposite.
Nanjing Night Net

The superannuation guarantee has its origins in a deal done by the ACTU with the Hawke government to forgo a 3 per cent wage increase for a 3 per cent compulsory employer superannuation contribution.

In 1992, after a Senate select committee inquiry into superannuation, the guarantee system was introduced by the Keating government. There have been minor changes over the years.

Due to a lack of clarity in the definition of salary used by the system, less than scrupulous employers are able to reduce their required contribution. This occurs when employees try to improve their retirement investments by making voluntary salary-sacrifice super contributions.

The Tax Office, in information provided to employers to help them meet their super guarantee commitments, states that the salary to use for an employee is evidenced by:

■ Ordinary weekly earnings; or

■ The salary specified in an industrial agreement or employment contract; or

■ The amount calculated by the payroll system.

It is this multiple choice of the salary figure to be used by employers that creates problems for employees wanting to sacrifice salary into extra superannuation contributions. This is because some employers follow the letter of the law and base their super guarantee contribution on ordinary weekly earnings after the employee sacrifices some of their wage or salary.

Take for example an employee on a salary of $50,000 a year. If they did nothing, the employer super guarantee contribution should be $4500. But if the employee chooses to salary sacrifice $5000, they are now being paid a weekly salary based on $45,000.

This means their employer is able to base that 9 per cent contribution rate on the lesser salary and only contribute $4050.

In some cases less scrupulous employers are able to avoid making any contribution at all. This is because, some legal experts believe, there is the possibility for an employer to count the $5000 salary sacrificed as meeting their requirement to make the $4050 contribution, and therefore not make any contribution.

Both main political parties are aware of this flaw in the design of the system. The best response that the Gillard government has provided is: “We are considering the issues raised in relation to salary sacrifice.” Given that this problem has existed since the system was introduced, offering to consider the issues raised is far from comforting.

If employees were hoping for a more concerned attitude from the opposition, they will be sorely disappointed. Mathias Cormann, shadow minister for financial services and superannuation, said: “We have no current plans to revisit the way compulsory super and salary sacrificing interact. Obviously employees choosing to salary sacrifice will make judgments on whether or not salary sacrificing makes sense for them given their individual circumstances.”

The problem can be solved by tightening the definition of salary for SG purposes to that of salary plus amounts sacrificed as superannuation contributions.

Hoping that politicians will do the right thing has not worked for more than 20 years. Perhaps the only way to achieve fairness is for employees to write to their federal member.

This story Administrator ready to work first appeared on Nanjing Night Net.