The deadline for SMEs to meet choice of superannuation requirements is looming, and there will be harsh penalties for those who don’t comply – Michael Hutton takes us through some of the most important issues and common scenarios.
Anecdotal evidence suggests that many SMEs have done little, if anything, to prepare for the introduction of the choice of superannuation fund legislation. Time is fast running out for them to comply.
If they don’t get started soon they may be unable to meet their legal obligations by the due date of July 29, 2005. Companies finding themselves in this position will inevitably find implementation more costly and time consuming.
How do employers know what to do? For those who have not yet prepared, some general advice is on the way. The Choice of Fund Form, the relevant sections of which must be completed by all employers before it is distributed to employees, is now available. The Australian Tax Office is mailing a ‘Choice of Fund information pack’ to employers. Any employer who has not yet received it should follow up with the ATO. Those employers who have received it should take the action outlined.
July (ensuring adequate systems are set up, a complying default fund is in place, and ensuring all employees have completed and returned their choice of fund forms) and October (when the first superannuation contributions under Super Choice must be made) will be the crunch months.
Successful and timely implementation will, to some extent, depend on turnaround from external suppliers. The systems of suppliers in the superannuation area are likely to be fully stretched over the next few months. Penalties for non-compliance are harsh—up to $500 per employee per quarter. To a large extent, how difficult and complex execution becomes is dependent on the number of employees; the smaller the payroll the easier it should be.
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Finding Help
In addition to the information pack being distributed, there are several other places employers can turn to for help and advice. Some businesses are retaining their accountants or financial planners to help them smooth the way. This approach allows businesses to help their employees understand their rights as well as their individual obligations. It also helps ensure employers do not inadvertently breach the law in other ways. For example, one mistake that must be avoided by businesses is giving advice that in any way can be considered investment advice, unless they are licensed under the Financial Services Reform Act.
This is a difficult area as employers are also required to show due care in selecting the default superannuation fund. However, in selecting the default fund they must make sure they don’t then suggest to their employees in any way that it is the best fund to place their money in because of superior investment returns. Neither should employers recommend the most appropriate investment mix within their fund for employees.
Having access to a financial adviser will also helps SMEs keep up to date with any new requirements brought about by changes to the legislation. For example, a recent amendment to the legislation is that the default fund selected by employers must offer a minimum level of death cover, although there are some exemptions. Knowing the detail of such changes is critical if they are to be implemented correctly.
There are a number of traps for employers in the introduction of Super Choice. Execution needs to be managed carefully on a step-by-step basis with good record-keeping. However, the ATO is likely to be lenient where it can be shown that a real effort has been made to implement Super Choice correctly and that any non-compliance is caused by a genuine mistake or misunderstanding.
SMEs could be faced with making contributions to a number of different superannuation funds, possibly a different fund for each employee from day one. Even if most employees choose to remain with the same fund initially, over time, as people change jobs and retain their existing superannuation funds when they move to a new employer, it is likely that the number of funds will increase significantly. This will increase demands on the payroll function and monthly workload.
It may be worthwhile for SMEs with several employees selecting a number of funds to look at the services of a clearinghouse to handle distribution of employee contributions. A clearinghouse facility is a service that receives a remittance and disbursement instructions from an employer, and then distributes the contributions by employee name between the different funds nominated.
Typically this service will be provided by large public offer superannuation funds where they are selected as the default fund. It is an option that may be very useful for employers who will find it difficult and time consuming to make multiple payments to their employees’ chosen superannuation funds.
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Important Questions
Employers and their payroll staff have many issues to consider in complying with their obligations. There are a number of questions that must be answered during implementation. These include:
Is it necessary to offer choice to all of my employees? Generally, yes, unless any employees are covered by a state industrial award (apart from Western Australia) or by a workplace agreement.
Which of my employees are covered under various awards and what are the requirements of those awards? Some employees may be exempt and employers need to know what awards apply to exempt any of their employees and what the requirements of these may be, and take them into account.
Does the current employee superannuation fund satisfy the criteria of a ‘default’ fund? It is critical to resolve this quickly if it hasn’t already been checked. It will take time to set up a ‘default’ fund if the present fund does not comply; and further time to transfer employees who do not nominate other funds into the new default fund.
How many of my employees are likely to exercise their right of choice? This is the big unknown throughout all workplaces. The only way to find out is to ask your own employees what their intentions are, and to set up communication programs on choice to help them understand the implications (without giving investment advice, unless you are managing the process through a licensed financial planner).
What do I do if an employee does not correctly complete the standard choice form? It is your responsibility to get this done. Having procedures and communication programs set up will be useful, if not essential.
How will I keep track of which employees have returned their choice of fund form? This also needs to be systemised so you do know and, again, the complexity will depend on the number of employees in the business.
How will I ensure that the superannuation fund chosen by employees is a complying superannuation fund? This is your responsibility. Employers should ask to see their employees ‘regulated fund form’ that will be supplied to them by their selected super fund. If this form is not supplied, employers can check the nominated fund is listed at www.abr.gov.au
Is the payroll department resourced enough to cope with these changes by July 29, 2005? Most propriety payroll software programs, especially those developed in Australia, will have updates available and should comply. But if this hasn’t been looked at by now, and if there are problems, businesses are running out of time to get them fixed.
How will I ensure that all new employees are provided with a ‘choice of fund form’ within 28 days of the commencement of their employment? It’s a simple procedure, but, again, the forms need to be made available and the people responsible for recruitment in every business need to understand the regulatory requirements.
* Michael Hutton is the partner responsible for financial planning and superannuation services at accountants, business and financial services provider, HLB Mann Judd Sydney.
