Super guarantee is no longer guaranteed and this has to stop

You can’t be sure the superannuation guarantee of 9.5 per cent gets paid, and the ATO can’t get the numbers right.

MasterChef judge George Colombaris’s restaurant group was caught underpaying its staff.

It’s official: the superannuation guarantee charge — the 9.5 per cent every employer must pay into superannuation each year by law — is not, in fact, “guaranteed”: it’s only an aspiration. Underpayment and non-payment are clearly widespread but the system is now such a mess that nobody can estimate how bad that mess is.

The only thing we know for sure is that the tax office is getting 20,000 cases a year and the amount it has recovered (rather than the amount actually gone missing) is close to $1 billion a year.

For investors and savers the news must be disturbing. It has been generally assumed the issue was minor and restricted to low-paid workers.

But following a Senate inquiry we now know the issue is rife — and it is linked primarily with the nature of the employer rather than the employee. The practice is most common in small business, but it can be found at all levels — for ­example, 5 per cent of underpayments are for figures of more than $100,000.

Thanks to the payroll problems of high-profile chefs Adriano Zumbo and George Colombaris (both linked with the MasterChef television show) the issue of staff underpayments has gone mainstream. For what it’s worth, the four worst industries are: construction, accommodation and food, manufacturing and what is tagged as “administration”.

The SGC is supposed to work like this: when you work anywhere you should get paid 9.5 per cent of your total salary as a super contribution.

How it actually works is farcical — your employer on a quarterly basis pays the money into your super fund — in turn your super fund once a year tells the ATO what the contributions were. If you have more than one fund (and most people have) the system throws up complications. If you have more than one employer the numbers are difficult to follow.

If a payment is not made in time — or not made at all — it is up to the employee to report the matter. No wonder just one in three complaints are made by people against their current employer.

If the company collapses then the payments never get made. The ATO reports that 30 per cent of non-payments are due to insolvency. This is what made the Senate inquiry recommend that insolvent company super issues are covered by the government, but this is still under debate.

System in unviable

In short, this is not a viable system — it works against the saver and the investor. It creates false assumptions that superannuation is guaranteed, that savings will always be rewarded.

In aiming to highlight the issue Industry Super Australia — the nation’s largest super fund — has issued a dramatic report suggesting the amount lost each year was $5bn, or $1500 each for more than two million workers.

The fund also makes the very valid point that super lost is compounded over periods of time; it gives a lower super balance total at retirement.

Unusually, the ATO itself has branded the Industry Super exercise as “unreliable” arguing the economic modelling used by the fund “substantially overstated underpayment”.

The problem is the ATO does not know what the number is — by its own admission in its research the ATO says it has a “low level of confidence in a statistical sense”.

There would seem to be two answers here — one structural, and the other that tries to fix the system as it is currently designed.

• The best way is surely to change the structure. Don’t have employers run the SGC system. Take the tax — because it is a tax — upfront in the same way as other business taxes are collected and then administer the distribution of the payments through a government agency.

Yes, it creates more bureaucracy, but there are times it pays to do this. The advantage is compelling — a neutral third party controls the distribution of super, not the employer. A good precedent is in the property rental market where residential tenancy bond authorities hold tenant bonds — not the landlord — and it is up to the council to determine if the boxes have been ticked and if the bonds are repaid to the tenant.

• The alternative is to try and upgrade the ATO and its powers within the system. Just now the ATO cannot count the money and it cannot depend on the numbers. For a start, the payments should be made on payroll day — typically monthly; this would begin to reduce the time lags in the system and the level of systemic underpayment. Allow other agencies — such as super funds themselves — to launch legal action, not just employees.

Beyond all this there is the rotten loophole which allows employers — unbelievably — to abuse salary sacrifice arrangement simply by reducing their SGC commitments by the amount salary sacrificed by the employee.

Salary sacrifice is the concept of contributing some salary on a pre-tax (concessional) basis into super above the SGC level of 9.5 per cent (to a cumulative maximum of $25,000 per annum after July 1).

This is a loophole and no doubt only used by the worst companies in the most desperate circumstances. The ATO says this is minor, but the industry funds say it is $1bn issue.

On this issue there really should be no need to do further research — it is the antithesis of what superannuation and savings policies are supposed to be, and it should be outlawed immediately.