House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Chapter 3 Calculation of Individual Shortfalls

Overview of the Chapter

This chapter sets out the procedure for determining whether an employer has an individual superannuation guarantee shortfall in respect of an employee and the calculation of the amount of the shortfall.

Explanation

Introduction

In order to determine if an employer has an individual superannuation guarantee shortfall in respect of an employee, the employer will need to ascertain the following:

•

the percentage level of superannuation support the employer is expected to provide for the employee;

•

the percentage level of superannuation support actually provided for the employee.

If the actual percentage level of superannuation support is less than the expected percentage level of support a shortfall will arise.

An employer's level of superannuation support will be measured on an annual basis for the 1992-93 year and on a monthly basis for subsequent years. The period in which support is measured is known as the 'contribution period'. [Subclause 6(1)]

Level of superannuation support an employer is expected to provide

The level of superannuation support an employer is expected to provide depends on the amount of the employer's 'annual national payroll' and the financial year in which the employer is an employer for a full year. An employer's 'annual national payroll' for a year is the total amount of salary and wages paid during the year by the employer in Australia and outside Australia in relation to services performed or rendered wholly in Australia [Subclause 6(1)]. An employer's annual national payroll will include salary and wages paid to employees for whom the employer has an exemption (see 'Exemptions' in chapter 2), where the salary and wages satisfy the meaning of 'annual national payroll'. (This does not include amounts paid to a person as a member of a Defence Force Reserve.)

If the employer was an employer for the whole of the 1991-92 year the expected percentage level of superannuation support (known as the 'charge percentage') will be based on the employer's annual national payroll for the financial year ending on 30 June 1992. The charge percentage will be determined as follows:

An employer will use whatever column applies in the 1992-93 year for all subsequent years irrespective of changes to the employer's annual payroll. For example, if an employer's annual national payroll was $430.000 for the year ended 30 June 1992 and $560,000 for the year ended 30 June 1993, the employer's charge percentages for the 1992-93 and 1993-94 years will be 3%. [Clause 20]

If an employer was not an employer for the whole of the 1991-92 year, the employer will use the charge percentage in the first column in the above table until such time as the employer is an employer for a full financial year. If, in that first full financial year, the employer's annual national payroll exceeds $500,000, the employer will use the second column in the above table for the year following the full financial year and all subsequent years. Otherwise, the employer will continue to use the first column in the table for all years. [Clause 21]

For example, assume an employer commenced as an employer on 1 January 1992 and has annual national payrolls of $300,000, $600,000 and $700,000 for the 1991-92, 1992-93 and 1993-94 years respectively. The employer's charge percentage will be 3% for the 1992-93 year, but 5% for the 1993-94 year because the employer's annual national payroll for the employer's first full financial year (i.e. the 1992-93 year) exceeds $500,000.

Actual level of superannuation support an employer is providing

An employer will need to measure the actual level of superannuation support the employer is providing in respect of each employee. The method of measuring that support will depend on whether the support is provided in a defined benefit superannuation scheme or another type of superannuation fund.

No matter which type of fund or scheme the employer is contributing to, the fund must be a 'complying superannuation fund or scheme'. A 'complying superannuation fund or scheme' is a fund or scheme which is a complying superannuation fund for income tax purposes. [Clause 7]

Measuring employer support in a defined benefit superannuation scheme

A 'defined benefit superannuation scheme ' is a superannuation scheme in which one or more members of the scheme are entitled upon retirement to be paid a benefit which is based on either or both of the following:

•

the amount of the member's annual salary at the date of retirement, at a date before retirement or averaged over a period of employment before retirement;

•

a specified amount

In addition, if the scheme is not a public sector scheme, some or all of the contributions to the scheme must not relate to any particular member, but be paid into and accumulated in the form of an aggregate amount. A 'public sector scheme' is a superannuation scheme established under a law of the Commonwealth, State or Territory or under their authority. It also includes a superannuation scheme established under the authority of a municipal corporation, local governing body or a public authority. [Subclause 6(1)]

If an employer is providing superannuation support through a defined benefit superannuation scheme which is also a complying superannuation scheme, the employer will need to obtain a benefit certificate. The benefit certificate will state the percentage level of superannuation support being provided by the employer for each class of employees in that defined benefit superannuation scheme. The figure shown on the benefit certificate (known as the 'notional employer contribution rate') will be able to be used to reduce the employer's charge percentage in respect of an employee within the class and thereby reduce the amount of any individual superannuation guarantee shortfall for that employee. If the employee is only a member of the defined benefit superannuation scheme during part of his or her employment in the contribution period, the notional employer contribution rate is reduced by the fraction calculated as follows:

(period during which the employee is a member of the fund / period of employment in the contribution period)


[Clause 22]

Example 2

Assume an employee was employed by the employer for all of the 1992-93 year and became a member of the defined benefit superannuation scheme on 1 October 1992 (i.e., the employee was a member of the scheme for 273 days during the 1992-93 year). The employer has a benefit certificate specifying a notional employer contribution rate of 6%. The employer's percentage level of superannuation support provided in that fund for the 1992-93 year for the employee will be:

6% * (273/365) = 4.49%


Benefit Certificate

A benefit certificate is a certificate prepared by an actuary. The certificate will relate to a specific defined benefit superannuation scheme or schemes, and will specify the percentage that is in the actuary's opinion the notional employer contribution rate for a class of employees in the scheme or schemes to which the employer is providing support. The notional employer contribution rate is the rate of contribution that an employer would have had to contribute to a comparable defined contribution superannuation fund to provide a benefit approximately equivalent to the minimum employer funded benefit accruing from 1 July 1992 to an employee in the class under the defined benefit superannuation scheme or schemes.

The regulations to this Bill will set out the method of determining the notional employer contribution rate as well as what is a comparable defined contribution superannuation fund. The procedures for issuing benefit certificates as well as their form is also to be dealt with by regulation.

A benefit certificate will have effect from the time it is issued until either:

•

the superannuation scheme to which the benefit certificate relates is amended in such a way that the level or method of calculation of benefits for the relevant class of employees is affected; or

•

another benefit certificate is issued in relation to the same class of employees and the same scheme; or

•

5 years expires;

whichever occurs first. [Clause 10]

Measuring employer support in a fund other than a defined benefit superannuation scheme

If an employer is providing superannuation support in a complying superannuation fund that is not a defined benefit superannuation scheme, the percentage level of the employer's support will be the proportion of the employer's contributions to the fund for the employee over the employee's 'notional earnings base' (see explanation below) in respect of that fund.

An employer will take the following steps in determining the percentage level of support for an employee:

1.

If the employer is contributing to a complying superannuation fund in accordance with an 'industrial award'(see explanation below) for the employee and the award specifies a percentage of notional earnings base as the basis for the superannuation contributions, the employer's percentage level of support for the employee is calculated as A x B where:

A = (total contributions to the fund during the contribution period / notional earnings base for the employee)
B = 1; or
if the employee is only covered by the award superannuation arrangements for part of the period during which the employee was employed:(period of employment covered by the award / period of employment in the contribution period)
[Subclause 23(2)]

NOTE:

the notional earnings base is the base for the period the employer is providing support in the fund.

2.

If the employer is contributing to a complying superannuation fund under an occupational superannuation arrangement (see explanation below) for an employee and the arrangement specifies a percentage of notional earnings base as the basis for the superannuation contributions, the employer's percentage level of support for the employee is calculated as A x B where:

A = (total contributions to the fund during the contribution period / notional earnings base for the employee)
B = 1; or
if the employee is covered by the arrangement for part of the period during which the employee was employed:(period of employment under the arrangement)/(period of employment in the contribution period)
[Subclause 23(3)]

NOTE:

the notional earnings base is the base for the period the employer is providing support in the fund.

3.

If (1) or (2) do not apply and the employer is contributing to a complying superannuation fund under an applicable superannuation scheme (see explanation below) for the employee and that scheme specifies a percentage of notional earnings base as the basis for the superannuation contributions, the employer's percentage level of support for the employee is calculated as A x B where:

A = (total contributions to the fund during the contribution period / notional earnings base for the employee)
B = 1: or
if the employee is only receiving employer support for part of the period during which the employee was employed:(period during which the employer contributes to the fund)/( period of employment in the contribution period)
[Subclause 23(4)]

NOTE:

the notional earnings base is the base for the period the employer is providing support in the fund.

4.

If (1), (2) or (3) do not apply, and the employer is contributing to a complying superannuation fund, the employer's percentage level of superannuation support is c,calculated as A x B where:

A = (total contributions to the fund during the contribution period / ordinary time earnings for the employee)
B = 1; or
if the employee is only receiving employer support for part of the period during which the employee was employed:(period during which the employer contributes to the fund / period of employment in the contribution period)
[Subclause 23(5)]

NOTE:

Ordinary time earnings is the earnings for the period the employer is providing support in the fund.

In determining the actual level of superannuation support, contributions made on behalf of an employer will be treated as contributions of the employer. [Subclause 6(2)]

An employer is able to treat contributions made between 1 July 1993 and 14 August 1993 (inclusive) as relating to the 1992-93 year. Similarly for the 1993-94 year, and subsequent years, contributions made within 28 days of the end of a month may be treated as relating to the original month. If contributions made after a contribution period are treated as relating to a prior period, they cannot be treated as contributions for the period in which they are paid. This ensures double counting of contributions does not arise. [Subclauses 23(6),(7) and (8)]

Examples

Example 1

Assume:

•

the employer has one employee during the 1992-93 year;

•

the employee is employed for the full year and has a notional earnings base of $28,000 under an award superannuation arrangement which applied to the employee for the full year;

•

the award requires the employer to contribute 3% of the notional earnings base;

•

the employer actually contributes $900 to a complying superannuation fund for the employee.

The employer's percentage level of superannuation support is:

($900 / $28000) * 1 = 3.21%


Example 2

•

as per example 1 except the employee was only covered by the award superannuation arrangement from 1 October 1992 (i.e., 273 days for the 1992-93 year), the employee's notional earnings base from that date was $17,000 and contributions of $600 were made.

The employer's percentage level of superannuation support is:

($600 / $17000) * (273 / 365) = 2.64%


Example 3

•

as per example 2 except the employer contributed $300 during the period from 1 July 1992 to 30 September 1992 to a complying superannuation fund which did not have a notional earnings base and the employee's ordinary time earnings for that period was $12,000.

The employer's percentage level of superannuation support is:

1 July 1992 to 30 September 1992 ($300 / $12,000) * (92 /365) = 0.63%
1 October 1992 to 30 June 1993 ($600 / $17,000) * (273 /365) = 2.64%
Total Support 3.27%

Example 4

•

as per example 1, plus the employer has an agreement with the employee to contribute, in addition to the employee's award superannuation, 1% of gross salary and wages to another complying superannuation fund. The employee's gross salary and wages for the year are $30,000 and a contribution of $300 is made under that agreement.

The employer's percentage level of superannuation support is:

under award arrangement($900 / $28,000) * 1 = 3.21%
under occupational superannuation arrangement($300 / $30,000) * 1 = 1%
Total Support 4.21%

Meaning of 'Industrial Award', 'Occupational Superannuation Arrangement' and 'Superannuation Scheme'

An 'occupational superannuation arrangement' is defined in subclause 6(1) to mean an agreement which imposes an obligation on the employer to provide superannuation support for the employee. An example of such an agreement would be a documented private agreement between an employer and the employer's employees.

An 'industrial award' is an industrial award or determination made under a law of the Commonwealth, State or Territory or an industrial agreement approved or registered under such an law. [Subclause 6(1)]

A 'superannuation scheme' is a scheme embodied in the governing rules of a superannuation fund or a defined benefit superannuation scheme. [Subclause 6(1)]

Determining an employee's notional earnings base

As outlined above, an employer's actual percentage level of superannuation support is based on the employee's notional earnings base. The notional earnings base to be used will depend on whether the employer was contributing to a superannuation fund immediately before 21 August 1991.

If the employer

•

was contributing to a superannuation fund under an industrial award, occupational superannuation arrangement or superannuation scheme immediately before 21 August 1991;

•

was contributing at that time either for the employee or another employee;

•

is contributing under that award, arrangement or scheme for the employee;

the notional earnings base for the employee is the earnings of the employee that constitute the earnings on which the employer's superannuation contributions for the employee are based under the award, arrangement or scheme. The notional earnings base will be the base determined at the beginning of the contribution period, or the first day of the employee's employment, whichever is the later. [Subclauses 13(1) and (2)]

Although an amount will be determined from the notional earnings base, it is derived from a concept. For example, assume an employer on 20 August 1991 had an agreement with employees to contribute 2% of base salary to a complying superannuation fund. If the employer is still contributing for employees in accordance with that arrangement, the notional earnings base for contributions under that arrangement will be base salary. If employer contributions in the 1992-93 year are based on base salary as at 1 July 1992, the amount of an employee's notional earnings base for 1992-93 will be that employee's base salary as at 1 July 1992. If, for example, employer contributions in 1992-93 are based on ordinary time earnings in 1992-93, the amount of an employee's notional earnings base for 1992-93 will be that employee's ordinary time earnings in 1992-93.

If an arrangement or scheme is amended after 20 August 1991 in such a way that the employee's notional earnings base is reduced, the employer will no longer be able to use that notional earnings base. In such cases, the employer will be forced to determine the notional earnings base as through no support was provided prior to 21 August 1991. This ensures employers cannot reduce the notional earnings bases for their employees. [Subclause 13(4)]

If an employer was not contributing under an award, occupational superannuation arrangement or superannuation scheme immediately before 21 August 1991, or was doing so but the notional earnings base was reduced, the earnings base will be as outlined below.

If the employer is contributing to a superannuation fund under an award, arrangement or scheme, the earnings base will be:

•

if the earnings base is equal to or greater than ordinary time earnings (see explanation below) - the earnings of the employee that constitute the earnings on which the employer's superannuation contributions for the employee are based at either the beginning of the contribution period, the first day of the employee's employment or the day on which the employer begins to contribute to the fund, whichever is the later;

•

if the earnings base is less than ordinary time earnings but is under an industrial award - the earnings base in the award on which the contributions are based;

•

in any other case - ordinary time earnings. [Subclause 14(1),(2) & (3)]

For example, assume an employer commenced as an employer after 20 August 1991 and was not covered by an award superannuation arrangement but was contributing under an occupational superannuation arrangement which had a notional earnings base of base salary. If base salary for an employee is less than ordinary time earnings, the employee's notional earnings base will be ordinary time earnings.

'Ordinary time earnings' means:

•

earnings for ordinary hours of work; and

•

earnings consisting of over-award payments, shift-loading or commission. [Subclause 6(1)]

Despite the above rules for determining a notional earnings base, an award, arrangement or scheme which specifies that superannuation contributions are to be based on a specified amount of money which does not change in line with changes in the employee's earnings is not a notional earnings base.

For example, an arrangement which specifies that contributions are 3% of $20,000 does not have a notional earnings base. [Subclause 23(9)]

If an employee does not have a notional earnings base, any superannuation contributions will be measured against ordinary time earnings (see (4) in the earlier section on 'Measuring employer support in a fund other than a defined benefit superannuation scheme').

Diagram 3.1 sets out the steps in determining the notional earnings base.

Maximum Contribution Base

In order to ensure an employer is not expected to provide excessive superannuation support, a maximum notional earnings base (known as the 'maximum contribution base') will apply. [Subclauses 13(3) and 14(4)]

The maximum contribution base will be $80,000 for the 1992-93 year. Because support will be measured on a monthly basis for the 1993-94 year and subsequent years the maximum contribution base will be a monthly figure for those years. It will be the amount determined by indexing the $80,000 and dividing it by 12. For the years after the 1993-94 year, the maximum contribution base will be the monthly base for the prior year increased by an indexation factor. In making these calculations the maximum contribution base is to be a multiple of $10, rounding $5 upwards. [Clause 15]

For example, if the amount is calculated as $6,826 it is to be taken as $6,830.

The indexation factor used in the calculation of the maximum contribution base is the greater of one, or the number calculated by dividing the amount of the estimated full-time adult average weekly ordinary time earnings in the middle month of the March quarter in the preceding year by the similar figure for the year before that year. The estimate of the full-time adult average weekly ordinary time earnings is the estimate published by the Australian Statistician. [Clause 9]

Calculating the Individual Superannuation Guarantee Shortfall

Once an employer has determined the expected percentage level of superannuation support for an employee and the actual percentage level of superannuation support for the employee, the employer is able to ascertain the shortfall (if any) arising. The employer's individual superannuation guarantee shortfall in respect of an employee will be the amount calculated by multiplying the employee's salary and wages for the contribution period by the charge percentage remaining after deducting any reductions for actual superannuation support provided.

For the 1992-93 year the shortfall will be determined on an annual basis. From 1993-94 the shortfall will be determined on a monthly basis, with the shortfall for the year being the sum of the monthly shortfalls. [Clauses 18 and 19]

The steps to be taken in calculating the individual superannuation guarantee shortfall are set out in Diagram 3.2.

Examples

Example 1

Assume the employer has one employee who has a notional earnings base of $30,000 in the 1992-93 year. The employee's gross salary and wages are $32,000 in the year. The employer makes superannuation contributions of $600 during the year for the employee. The employer's charge percentage is 3%. The employer's actual percentage level of support is

($600 / $30,000) = 2%


The employer's individual superannuation guarantee shortfall in respect of that employee is:

$32,000 * ((3-2)/100) = $320


Example 2

Assume the employee in example 1 has, in 1993-94, a notional earnings base of $2,600 per month and receives gross salary and wages of $2,700 per month. The employer makes superannuation contributions of $52 per month for the first 6 months of the year and $80 per month for the second 6 months.

The employer's actual percentage level of support is:

for first 6 months($52 / $2,600) = 2% per month
for second 6 months($80 / $2,600) = 3.08% per month


The employer's individual superannuation guarantee shortfall for each of the first 6 months is:

$2700 * ((3-2) / 100) = $27 per month


No shortfall exists in respect of the second 6 months._

The employer's individual superannuation guarantee shortfall for the year is the sum of the shortfalls for the year, that is:

$27 x 6 = $162