Super protection if the boss sinks

AS share markets tumble, hitting your superannuation balances, spare a thought for those who face a double whammy as their employer goes to the wall.

Superannuation protection / Priit Kallas

Protection if the boss sinks

AS share markets tumble, bringing down your superannuation balances with them, spare a thought for those who find themselves facing a double whammy as their employer goes to the wall.

Not only have their super balances been hit by the wild gyrations on the market, but they may well not have received any superannuation guarantee payments for the best part of a year.

According to Andrew Needham, director of business recovery at HLB Mann Judd, some employers can go up to a year without making compulsory super payments to employees before the Australian Taxation Office catches up with them.

As a result, if you were on a $150,000 salary you could be $13,500 out of pocket if your employer had failed to make contributions in the 12 months before the company failed.

Add to that the lower value of your super thanks to the volatility on investment markets and you are soon hurting.

So what are your chances of recovering this super money once your employer becomes insolvent and has to enter some form of external administration?

The good news is that from January 1 this year, the chances are greater than they were in the past, thanks to Corporations Act changes.

Under the changes any outstanding employer contributions and any amount payable to the ATO as Superannuation Guarantee Charge (SGC) will get the same priority as other debts and will rank equally with employee entitlements like unpaid wages.

"This means that any outstanding super contributions and superannuation guarantee charge will be paid to employees before payments to ordinary unsecured creditors and once priority creditors and liquidators' fees are paid," says Raelene Vivian, deputy tax commissioner.

Ross Stephens, director of superannuation at KPMG, says the move lifts superannuation up the ladder.

"Super, particularly SGC, was down behind wages and effectively treated as just another unsecured creditor. The new rules now ensure that unpaid super and SGC is ranked equally with unpaid wages and will be paid in priority to unsecured creditors," Stephens says.

Of course, it assumes there is money left in the company to pay the superannuation. If there is no money, then you will miss out.

The General Employee Entitlements and Redundancy Scheme is a government scheme that can provide for unpaid wages, annual and long service leave, payment in lieu of notice and redundancy pay, but it does not cover super.

So, if there is no money available, then hopefully it should only be up to one year's worth of super and maybe only one quarter's worth that you will have lost.

That's because under the superannuation guarantee law, employers who don't pay enough superannuation contributions by the quarterly cut-off dates are liable for the SGC.

This charge, which comprises the shortfall in super contributions plus an administration fee and interest, is collected and then transferred by the ATO to the employee's chosen superannuation fund.

As a result most companies will only fall under the radar for a few quarters before the ATO recognises the shortfall and collects the money on the employees' behalf.

Before the legislative changes were made at the start of the year, there were situations where employees may not have received priority for SGC.

Now when you have a company that has a receiver appointed, employees will receive priority for the SGC.

The new legislation also ensures that when a company enters voluntary administration and proposes a compromise to creditors via a deed of company arrangement (DOCA) the DOCA must give priority to the payment of employee entitlements.

The rules were brought into being because in 2005 both the directors/employees of DP Excavation and Haulage and the ATO (for the SCG) submitted a claim to the liquidator.

The Supreme Court found that both claims were valid as it was not the same sum of money and as a result of the two groups of claimants this was unfair to other creditors.

But while the new rules that came into effect in January may be good news for regular employees, they may not be so great for directors.

In the past directors and their relatives have been able to circumvent the cap that applied under the Corporations Act of $2000 for unpaid wages and $1500 for annual and long service leave.

This was because they had a separate statutory assessment and so could bypass the act's statutory limitation and receive a lump sum of unpaid superannuation monies that could be up around the $100,000 mark.

Since the beginning of the year the superannuation guarantee charge will be included in the capped amount of $2000, taking away the opportunity for a windfall payment.

Any amount exceeding $2000 will rank with unsecured creditors.

In some quarters this move has been welcomed with the observation that the directors probably contributed to the insolvency in the first place, so why should they be able to circumvent the act?

The new rules apply to companies that go into liquidation, administration or receivership after December 31 last year.