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Fixing a Super admin mess
It costs everyone unnecessary $s!

June 2011

The administration of Australia's compulsory superannuation system is an inefficient mess that costs businesses and workers real money.


  • Workers are paying too much in administration, which means less money for them.
  • Businesses, particularly small businesses, lose time and money in unnecessary administration.
  • The rules are confused about who has to pay, and little known 'trick rules' catch self-employed people unawares.

But there is a fix

This year (2011) the Council of Small Business of Australia (COSBOA) decided to promote a simple policy to fix the mess:
  • Instead of small business people having to send employees' superannuation money directly to the superannuation funds, the businesses include the super money in their regular payments to the Australian Taxation Office. Workers notify the ATO of their superannuation fund details. The ATO sends the money to the super fund.
Here's COSBOA's explanation and its update on the savings to be achieved. It's a surprisingly simple and commonsense solution that solves lots of problems. We explain below the problems and why this simple solution would work.

Tony Abbott adopts this policy

In an unexpected move, the leader of the federal opposition, Tony Abbott, formally adopted the COSBOA policy as Coalition policy on 2 June 2011. This means that if there's a change of government at the next election, this policy will become reality. ICA is a member of COSBOA and strongly supports the initiative.

Gillard Government opposes the policy

However, the Gillard government immediately came out and criticised the initiative. This is what Assistant Treasurer Shorten and Small Business Minister Sherry said. The head of the superannuation fund industry association also opposed the initiative. The Tax Office said that the initiative would cost, on average, $62 million a year to administer. But the CEO of COSBOA, Peter Strong, says that there will be savings of $320 million a year. That's extra money in workers' superannuation pockets!

The problems

1) Confusing law = high cost
The law declaring who must pay superannuation is confusing and not easily understood. It works this way.

Businesses must pay compulsory superannuation for workers who are employees. But the laws also says that if a worker is not an employee, the business must still pay superannuation if the work is 'wholly or principally for labour'. The trouble is that these legal definitions are highly technical and enormously difficult to understand. It's impossible to understand unless a court gives a ruling. What happens is:
  • Businesses who use self-employed people on a commercial contract don't pay superannuation.
  • The self-employed person is paid more to include the superannuation benefit.
  • The self-employed person pays his or her own superannuation.
  • But then the Tax Office investigates and decides that superannuation should have been paid. They take the matter to court.
  • The court rules that superannuation has to be paid. The business receives a massive bill going back several years---even though they paid the self-employed person more.
  • The superannuation is paid by the business but then the Tax Office investigates the self-employed person.
  • There's a 'trick rule' called the 10% rule. If a person has superannuation paid part by an 'employer' and part by themselves, they are not allowed the normal tax deductions on the amount they paid. The self-employed person then receives a massive back tax bill.
Conclusion? The system is totally dysfunctional from a practical point of view. Even when people genuinely try to do the right thing, they can't because the rules are completely unclear.

The foregoing explanation is not theoretical. Here and here we detail three cases where businesses, believing they were doing the right thing, have been caught in the super trap. In one case, this has led to a High Court challenge to the constitutional validity of the superannuation laws.

When situations such as those detailed above occur, there is always bad publicity about 'sham contracting'. However, it's not 'sham contracting' that's the problem, but 'sham laws'.

How the COSBOA/Abbott initiative will fix this problem
At the moment, whether a business has to pay superannuation depends on legal interpretation of confusing laws. The COSBOA/Abbott initiative will mean that small businesses will not have to pay the superannuation. They will instead send all the money (income and super component) to the Tax Office. The income earner (worker) will inform the Tax Office about which super fund his or her money should be sent. All income earners will have more control and greater involvement in what happens with their super money.

2) Superannuation money is not paid. Auditing and compliance problems
The Tax Office is responsible for checking if super has not been paid by a business. But the Tax Office has enormous problems with auditing and compliance. Because businesses are supposed to pay the superannuation funds, the Tax Office has difficulty finding out if the money has been paid or not. Huge time lags occur.

There are many reasons why a business might not pay superannuation.
  • Some business people can be dishonest and hold on to the money.
  • Some are confused by the law (as above) and believe (often correctly) that they don't have to pay.
  • Some businesses have gone bankrupt and the super funds have to try and collect the money.
How the COSBOA/Abbott initiative will fix this problem
With businesses paying the Tax Office, there will be immediate information about who has paid and who has failed to pay. Their will be no time lag. Confusion about who has to pay and not pay will be removed. If a business has failed to pay, the Tax Office has wide powers (under PAYG collection) to demand payment and garnishee money from businesses bank accounts. Workers will receive greatly increased security over their super money.

3) Lost superannuation money
There is around $20 billion sitting in superannuation funds, paid to them by employers where the identity of the worker who owns the money is unknown. This is 'lost super' that rightly belongs to people and it's not in their accounts. Government and the superannuation funds spend massive amounts of money trying to locate who the money belongs to. But the system is so dysfunctional that the 'lost' money just keeps increasing.

How the COSBOA/Abbott initiative will fix this problem
Because the Tax Office will directly receive the superannuation money from businesses, the owners of 'lost' money will be easily traceable. Because at the end of each year businesses have to supply the Tax Office with details of all workers and their tax file numbers, the Tax Office will have a full database of money received and to whom it should belong. Any income earner who has failed to notify the Tax Office about their superannuation fund will receive a notice from the Tax Office asking for the matter to be fixed. 'Lost' money will no longer be 'lost'.

4) Better, more efficient and cheaper administration
At the moment, businesses wear the cost of administering superannuation payments. This can be complex because the superannuation funds have a history of poor administration themselves, with confusing, complex forms and poor follow-up. This administration:
  • Costs business, particularly small businesses, larges sums of money.
  • Costs super funds large sums of money checking employers and having to double-check with employees. The cost of this unnecessary administration comes out of the super money of the workers. COSBOA estimates this to be around $320 million.
How the COSBOA/Abbott initiative will fix this problem
With the Tax Office handling the administration there will be big savings.
  • Businesses will have their red-tape administrative burden reduced substantially.
  • Superannuation funds will pay the Tax Office to handle the administration so that taxpayers won't carry the cost. The superannuation funds will save an estimated $156 million after paying the Tax Office.
This will mean extra money available in the super funds of each Australian worker.

Conclusion

The Federal government conducted a review of superannuation in 2009-10 but did not address these key administrative design flaws. The COSBOA/Abbott initiative fixes major problems. It's a super win for workers, businesses and government. Win-win-win. That what we like to see!

Send us a Comment

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Submitted Comments

On 22 June, John wrote:

I worked with COSBOA as one of their reps on the Strong Super committee and sub committee. The COSBOA position is that Small Business people have been dumped on as an unpaid administration service forGovernment and Super Funds. The proposition to just take mandated Super Guarantee payments out of tax payments clears away many layers of imbedded administration and fines, interest charges and penalties. In working on possible answers with COSBOA I came to understand their position is that Small Business people are being so overwhelmed with so many layers of rules that many are guaranteed to break them just from the sheer number they have to comply with. My original background is out of industry in Quality Assurance and Production roles where we were focussed on efficiency rather than suffocating control. I]ve tried to show the Superannuation process from this point of view in an article now published on the COSBOA website. Perhaps a tad long but it does contain my thoughts as to how and why the proposal may work.

See "The frogs are boiling, the mice are dodging elephants and we are all looking for a clean tea cup. The game goes on" currently up on their website.


On 14 June, Greg wrote:

Reading through the various press releases, the Labor gov't are bagging "Tony Abbott's" plan as a bad idea and waste of money because it duplicates their existing initiative via Medicare. They even mention small business groups support it, but the super industry doesn't. Yet, looking at the COSBOA website, they quite clearly state it's their plan and Tony Abbott has announced support for them.

Either there are some very confused people here or there is deliberate attempts at misdirection. Personally, I think COSBOA would get their own website correct. I also doubt any politician would willingly give credit to someone else if they thought they could claim it for themselves. Therefore I conclude Labor are spinning it as Mr Abbott's idea because it's easier to discredit that way, and in politics you never pass up an opportunity to discredit the other guy. But that doesn't explain why the Super industry is against a single point of collection, unless they are somehow profiting from the admin costs or the lost super money. (Conspiracy theorists may feel free to jump in here).

I can see some pros & cons to the COSBOA plan. Labor's Medicare idea was/is an improvement for any business that would otherwise have to deal with multiple super funds, but it's still a separate payment. We are doing a BAS every quarter anyway (some monthly)---adding the super payment on top of the GST/PAYG payment has to be simpler for all businesses (I wouldn't restrict it to the small end of town). Yes, there is a hit to the ATO to support it, but the increased level of reporting and data-matching (cos they'll have all the tax file numbers) should mean an increase in compliance and less cases to chase down. I wouldn't know where to start doing the numbers, but (after an up-front cost in changing computer systems) I can see a reduction in ongoing costs to the ATO if you take audit costs into account.

On the other hand, I don't see how it removes the confusion about who should pay super and who shouldn't. If you employ a contractor that has his own company, and his company pays his super, then you would expect to pay a higher rate to include the super component. This is not going to change no matter who the super gets paid to or how it's reported, the super doesn't need to be paid---until the courts rule on the 'wholly or principally for labour' trap. But by then it's too late, both contractor & contractee have been screwed over by the ATO.

OK, I admit that my only argument against the COSBOA plan is that it's no better or worse in this one area than the mess we have now. Actually I like the plan for its simplicity, even though it won't affect me personally because I have a self-managed super fund; I haven't lost any super money and I don't pay any fees.


On 8 June, Anthony commented:

I would like to add to the idea of bundling super in with tax, in the sense of one payment to ATO who would then pass on the super component. For a long time I have wanted a simple way to link super contributions to fluctuating weekly/fortnightly earnings, in the same way tax is linked to fluctuations. If the combined tax + super payment were to be made as a percentage of gross earnings, we would all pay more super with not much extra pain.


Geoff added:

This will only be of value to those employers who limit their contribution to SG only. Unless concessional and personal contributions are also included.