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10 Nov 2011

What will the Government's proposed increases to superannuation benefits cost my business?

by Dan Trindade, Lauren Townsend

If the Government's recently proposed changes to the superannuation guarantee scheme come into effect, labour costs will almost certainly increase, so employers should consider building flexibility into remuneration obligations.

The Federal Government last week set the wheels in motion to deliver on its promise to improve superannuation benefits for Australian workers by introducing a Bill to amend the Superannuation Guarantee (Administration) Act 1992 (the SGAA).

The current superannuation situation

For employees eligible to receive employer superannuation contributions, the SGAA in its current form requires employers to contribute 9% of their employees' ordinary time earnings to a complying superannuation fund or a retirement savings account on behalf of those employees, to avoid incurring the superannuation guarantee charge and associated costs and charges.

Employers are required to make these contributions until their employees reach the age of 70.

What might change?

In order to improve superannuation benefits for employees to ensure greater retirement incomes, the Bill proposes to:

  • gradually increase the superannuation charge percentage from 9% to 12%, between 1 January 2013 and 1 July 2019; and
  • from 1 January 2013, increase the age threshold for when an employer can cease paying superannuation on behalf of an employee without incurring the superannuation guarantee charge from when an employee reaches 70 years of age to 75 years of age.

All other characteristics of the current superannuation guarantee scheme will remain as they are now.

But, there is a catch…

Introduction of these superannuation reforms is dependent upon the relevant legislation to introduce the Government's Mining Tax being passed and commencing before 1 July 2013.

Will employers be able to offset the proposed increases against future pay rises?

Employers will be required to fund any additional superannuation contributions introduced under the Bill.

The ability of employers of employees covered by enterprise agreements and/or common law employment contracts to offset the cost of the superannuation increases (should they occur) will vary, and will depend upon all the circumstances of a particular employment situation, particularly the drafting of those instruments.

For example, some enterprise agreements that provide for future salary increases (usually expressed in percentage terms) express the increase to be an increase to the employee's base salary. If this is the case, employers will not be able to offset the cost of any superannuation increase against the base salary increase provided for by the enterprise agreement, because superannuation is not a component of base salary. Any attempt to reduce the base salary increase provided for in an enterprise agreement in this situation could expose the employer to legal action for breach of enterprise agreement and the imposition of penalties.

A similar situation arises where salary and salary increases provided for in employment contracts are expressed in terms of base salary, rather than a total remuneration package.

Careful drafting of salary increase clauses in enterprise agreements, employment contracts, letters of offer and remuneration policies between now and the proposed date of introduction of the superannuation charge percentage increases under the Bill could provide employers the opportunity to offset superannuation increases by reducing the amount of base salary increases. Such clauses can be drafted to have this effect whether or not the Bill – and the Mining Tax – are passed.

What should employers do now?

Employers should review their existing remuneration obligations to determine what action they will need to take should the Bill come into effect.

They should consider whether they wish to take steps to build flexibility into enterprise agreements or contracts of employment to offset any increased cost of employer superannuation contributions.

This should be considered now rather than closer to the date of increases taking effect, as any changes to make remuneration arrangements more flexible would need to be built into enterprise agreements or contracts of employment in advance of the superannuation increases taking effect.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.