Time running out for small businesses that have underpaid superannuation

Many small businesses have simply swept the issue of underpayment of superannuation under the mat for years. Picture: Brett Wortman

Tens of thousands of smaller enterprises have a long-held, deep, dark secret that has not been shared with banks or, in some cases, even the spouse of the entrepreneur. And if it becomes public after September 7 the secret could destroy the business and force the sale of family homes.

Right now, hundreds of thousands of small and medium-sized businesses are hanging on to life in the COVID-19 crisis.

But way back many years ago — as far back as 1992 — they underpaid superannuation. It might have been an accident or a foolish action under pressure but it’s been a nagging issue for a long time.

There were plenty of times in past years when many of the entrepreneurs could have paid the money but the penalties under the original superannuation legislation were in the vicinity of 200 per cent or more, and not tax-deductible. They dated back to July 1, 1992 and were so big that they would have destroyed the business. The entrepreneurs put solving the problem in the “too hard basket” and hoped it would go away.

Now thanks to Superannuation Minister Jane Hume they have a unique chance to pay the outstanding amounts of superannuation without any significant penalty — a 10 per cent tax-deductible interest penalty — but the opportunity has come in the middle of the COVID-19 economic downturn.

Back in 2018, the Morrison government realised that the harsh penalties were in fact depriving employees of the money that they were entitled to. The amounts involved were estimated to be between $2bn and $5bn.

So, it put forward legislation that would provide a six-month window of opportunity for enterprises to pay past employees the superannuation they were entitled to without those harsh penalties. It was a wonderful idea and would have enriched many employees and strengthened the job security of those still employed in the enterprise.

Sadly, while the ALP is now trying hard to be a small business party, from time to time it goes back to its big union/big company power base. Inexcusably, it blocked the legislation. When Hume became Superannuation Minister last year she took the bill out of its pigeonhole and managed to get some of the crossbenchers to support the legislation and it passed through the parliament. It did not receive royal assent until March 7, this year — exactly when the COVID-19 crisis erupted. Since then, the amnesty has been swamped by the daily news created by the pandemic.

Amnesty ending

But sadly, on September 7 the amnesty ends. This gives the small and medium-sized enterprises a range of choices.

If they can afford it, I would strongly urge all impacted enterprises to take advantage of the amnesty.

But many will not be able to afford it and will be frightened that if they disclose the liability to their banks it will be much harder to get a continuation of their loan deferrals.

The legislation provides that if enterprises confess their underpayment by September 7, the Australian Taxation Office will give them time to pay the amount. But, of course, once you’ve confessed there can be no going back.

No one is quite sure what the ATO will allow and even if it’s spread over a number of years there remains the danger of the banks. But the alternative is much worse.

If an enterprise decides not to confess at this time and later the ATO discovers the error, then penalties go back to around the 200 per cent-plus level and not tax-deductible, which will knock out most enterprises.

Some enterprises will reason that given that the ATO has not found their superannuation mistake or deliberate underpayment for many years, they might never find it.

The danger with that strategy is that the ATO is now rolling out a “single touch” payroll data reporting system which means underpayments are highly likely to be detected. And if they are discovered the penalties again destroy the enterprises and the employees’ jobs.

If after September 7 an enterprise’s fortunes improve and it confesses its underpayment the penalties will be much less but still huge.

Accordingly, those enterprises that can afford to pay or are likely to be able to afford to pay over reasonable time should take the risk with their banks and confess the underpayment.

No friend of small business

As we have seen in the past, parts of the ATO have a deeply entrenched anti-small business culture. But in this situation it will be under the eye of Hume so I think it will be fair. What happens after September 7 is a different matter.

The irony is that because the legislation dates back to 1992, a vast number of those owed money due to the past underpayment will have left the enterprise. Some may have died. Many current employees who don’t benefit stand to lose their jobs as a result of the enterprise-destroying penalties.

When Labor conceived the penalties back in 1992, they were thinking of big companies, not small ones.

In my view the ALP should admit its error in opposing the amnesty in 2018 and support any government move to extend the amnesty given COVID-19. Sadly, it will not happen