Government freezes super guarantee

The government has announced that it will freeze the superannuation guarantee at 9.5% until 2021.  Under previous plans, the super contributions paid by employers had been set to increase in 0.5% increments from the current rate of 9.5% until they reached 12% in 2019/2020. It will now be 2025 by the time the guarantee reaches 12%. The rationale behind the freeze on super is that it will ease pressure on the federal budget, due to the significant tax concessions associated with superannuation contributions.

There have been many claims by superannuation industry representatives about how this will impact the size of future superannuation accounts. While these figures can only amount to speculation because nobody can accurately predict wages, fund growth rates and the future taxation of superannuation, it is certain that these changes will result in smaller superannuation accounts. It is also likely that the freeze will disproportionately affect younger Australians, women, low-income earners and part time/casual employees.

There are, however, some strategies that may be useful to individuals seeking to counterbalance the impact of the freeze:

  • Salary sacrificing into your super is a great way to offset the impact of the superannuation guarantee freeze. The money that you salary sacrifice into super, known as concessional contributions, will be taxed at 15%, which for most people is significantly lower than their marginal tax rate. Therefore, salary sacrificing is a particularly effective tax strategy for high-income earners. Concessional contributions are capped at $30 000 per year for most people and $35 000 per year for over 50s. For low-income earners, the government co-contribution is a great way to boost super balances. If you earn under $34 448, the government will contribute 50c for every $1 you put into your super account from your after-tax income (up to a total co-contribution amount of $500). If you earn anywhere up to $49 448, you may also be eligible for reduced co-contribution payments.
  • If you are a low-income earner or are taking a break from work, it may be worth investigating the possibility of your partner making super contributions on your behalf. If you earn less than $13 800, then your partner will be eligible for a low-income spouse tax offset with a maximum value of $540.
  • It may also be beneficial to re-examine your superannuation investment strategy, considering the returns and risks involved with different investment options. Your investment strategy choices should be informed by your age, retirement goals and level of comfort with risk.

Regardless of whether or not the super guarantee freeze has affected your superannuation plans, now is a good time to start putting some serious thought into your superannuation, and the retirement that you want.

Are you ready for the Super Guarantee increase?

From July 1, 2013 employees will receive 9.25% compulsory superannuation and this amount will increase gradually  to 12% on July 1, 2019. This is great news for an employee’s super balance, but who will pay?  Either the employer takes the change as a direct, and potentially huge, increase in wage costs, or it convinces its employees to see the increases as part of the normal pay increases they will be expecting over the next seven or so years.In addition to increasing the level of SG contributions to 12%, the legislation also removes the age limit on SG contributions. Presently, SG is not required for an employee who is aged 70 or more.

Schedule of increases in the level of SG contributions

Year starting on    Super guarantee
1 July 2013    9.25%
1 July 2014    9.5%
1 July 2015    10%
1 July 2016    10.5%
1 July 2017    11%
1 July 2018    11.5%
1 July 2019 and after    12%

Minister for Employment and Workplace Relations Bill Shorten insists that, rather than constituting a ‘tax on business’, the super increase will be covered by ‘deferred wage increases’ worked out between employers and employees during wage negotiations.

The real challenge for HR departments, then, will be in communicating the change. Will they build the SG increase into the overall wage increase each year? This will depend on how well they can communicate to staff that super is, in fact, part and parcel of their remuneration. The challenge will be greatest in companies or industries where pay is usually expressed and perceived to be net of super.

A recent survey revealed that 95% of workers believe that job salaries should be advertised as base salary figure plus super and not as a total remuneration package. For most employees, super is seen as an “obligatory payment” from the employer rather than a legitimate component of a salary package.

This would suggest that it’s going to be an uphill battle for employers to convince workers (especially young ones) that their future wage increases will include a superannuation component, when most people only look at how much hits their bank account every pay period..

Another challenge for HR professionals is that the attitudes towards superannuation can vary greatly across industries. In the traditional white-collar industries of banking and accounting there is a better understanding of total remuneration packages as being an overall cost to the employer whereas other industries such as tourism and hospitality there is a focus on cash and super is barely on the radar.

There is no denying that the impact of these changes can be huge for businesses and yet, according to a survey by Aon Hewitt, many employers have not yet fully considered the effect it will have and have also not prepared themselves to avoid fines for non-compliance.

Aon Hewitt questioned 160 Australian companies about superannuation, which produced these interesting results:

  • 58% of employers were yet to determine their response to the SG hike
  • Of the 29 per cent of companies currently paying above the SG, only 11 per cent planned to stay the same amount ahead of the minimum when it went up, whereas 32 per cent expected to absorb the increase

Aon Hewitt senior consultant and actuary Ashley Palmer said “”Broadly speaking, those who use a remuneration packaging method may be passing the cost on to employees, while employers who use the base-plus approach will be bearing the increase themselves,”

So, what to do now?

  • If not already accounted for, the increases will need to be factored into your business’ budgets going forward.
  • Start thinking about how the increased level of SG contributions will affect remuneration packages from 1 July 2013
  • Consider any implications for employment agreements and remuneration packages, and this may require employers to review all staff contracts. Employers may need to seek legal advice in this area.
  • Ensure that their payroll systems are configured to remit the increased contributions to each employee’s superannuation fund.
  • Consider any older workers aged 70 or more, as SG contributions will need to be made for them from 1 July 2013.
  • Be mindful of the concessional cap of $25,000 which from 1 July 2012 applied to all employees.

Article by Mark Sablatnig, Manager, Prosperity Wealth Advisers Pty Ltd.  Mark provides solutions about corporate super, group insurance and employee benefits to our clients from offices in Brisbane, Sydney and Newcastle.