Addressing SG non-compliance
The ATO's effectiveness in identifying and addressing SG non-compliance
The ATO informed the committee that in 2015-16, ATO compliance action
$670.4 million SG charge raised (including penalties and interest);
$341.3 million SG charged collected;
2997 default assessments raised; and
877 Director Penalty Notices issued for SG debt of $130 million.
The ATO conducts audits and reviews to ascertain SG non-compliance.
Approximately 70 per cent of the cases the ATO looks into arise from employee
notifications, with the remaining 30 per cent of cases stemming from ATO
The ATO's compliance program is comprised of three review or audit
Employee Notification (EN) cases;
ATO initiated cases – SG Proactive; and
ATO initiated cases – Employer Obligations.
As the ATO stated in its submission:
The majority of our review and audit work is directly
addressing employee notifications. We also undertake ATO initiated reviews and
audits arising from case selections from high risk employers or from high risk
industries. We also examine SG payments when reviews and audits are undertaken
examining income tax employer obligations risks.
The ATO's submission notes that over the past three years, the ATO has
increased its efforts to select cases from a broader array of sources other
than EN. The submission also notes that the ATO takes a risk differentiated
approach to compliance activities which considers factors such as the industry
and market segment of the employer, as well as prior compliance history.
The ATO also highlighted the component of the compliance program that
examines employers that are suspected not to have met their SG obligation.
Analysis of ATO held data enables the identification of employers who are
considered a high risk of not having met their SG obligations:
By comparing salary and wage data from individuals income tax
returns with SG payments as reported by funds in member contributions
statements, a general assessment can be made as to whether an employee may have
received the SG they were entitled to. This information is then aggregated to
an employer level. This assessment is by no means definitive, but can highlight
employers who have a high probability of underpaying SG. This strategy focuses
our audit resources upon those employers.
Reviews and audits undertaken under this strategy have
consistently produced stronger results in terms of adjustments raised per audit
than is achieve by our Employer Notification driven work.
The ATO's approach to SG compliance activities can be generally
characterised as reactive, rather than proactive.
The committee received evidence indicating that the ATO's heavy
reliance on EN to trigger compliance activities is problematic, as it places
the onus on affected employees to take action. This in turn presents challenges
to the timeliness of notifications and the likelihood of SG being recovered.
As the IGT outlined to the committee, even if affected employees are
aware of SG non-payment, they may not take prompt action:
The reason is that they are usually amongst the most
vulnerable in our society and may be too afraid of potential repercussions such
as loss of employment. This is evidenced by the fact that approximately 70 per
cent of employees only notify the ATO of non-payment of their SG after the
relevant employment has ended. The result is that, generally, there is a
significant time lag between the non-payment of SG and when the ATO is made
aware of it, by which time the offending employer may no longer be a going
concern and it may not be possible to recover any such amounts.
The TCFUA submitted that the approach taken by the ATO is at odds with
the systematic non-compliance with SG and award superannuation obligations
evident in high-risk industries:
The system is premised on a range of questionable assumptions
that it is appropriate, on a policy level, to impose the greatest
onus on employees for ensuring that superannuation contributions are paid by
employers (i.e. that employees should essentially bear the primary risk in
relation to non-payment of superannuation);
that all employees have a good understanding of what
superannuation is, including an employer's obligations [in regard] to payments
and choice of funds;
that all employees have the resources and capacity (including
proficient English language and written skills) to effectively monitor their
superannuation payments, and secondly, make a complaint to the ATO in their own
that employees will pursue non-payment of superannuation (despite
the risk of threats to ongoing job and income security);
that non-compliance is confined to individual employees, rather
than being an entrenched systemic problem at a particular workplace.
Dixon Advisory also provided evidence that highlighted the problematic
aspects of a compliance regime too reliant on employee notifications. The
submission argued that placing the onus on employees to initiate the recovery
action with the ATO could be too daunting an experience for some individuals,
particularly in a small-medium business scenario where the fear of
recrimination may be high. The submission also stated that during periods of
poor business conditions where there was a strong perceived risk of foreclosure
or job loss, employees may consciously make the decision not to lodge an EN,
figuring that they would be better off foregoing SG if it assisted their
employer to remain solvent and protected their own job.
Dixon Advisory noted that this logic was detrimental to employees, as
it was difficult for an individual employee to assess the complex risks to
their financial situation when it was highly likely they did not possess enough
information to gauge the true operating position of their employer.
As an attachment to her submission, Dr Tess Hardy provided the committee
with a 2014 article from the UNSW Law Journal, authored by herself and
Professor Helen Anderson, which centred on issues around the detection and
recovery of unremitted superannuation.
The article examined 'the limitations inherent in the individual
complaint/risk based approach nexus' and identified the flaws in the assumption
underpinning the current SG compliance regime. In particular, the article
outlined the ways in which the reality of the situation differs from the
assumption that employees are in a position to detect unpaid SG and report it
to the ATO. These included that:
employees may be ignorant of their SG entitlements, the source of
the entitlement, or how to check that correct payments are being made;
employees may fear that questioning their employer will result in
employees may be more concerned about the underpayment of wages
and other entitlements;
employees may be unaware that underpaid wages almost
automatically means underpaid SG; and
to an employee missing out on employment entitlements, the ATO
may not seem the logical place to lodge a complaint over unpaid SG.
The article summarised the outcome of this situation:
Combined, these issues make it relevant to inquire whether
the current approach is adequate in protecting employees and whether any of the
detection and enforcement functions, which are increasingly placed on
employees, can and should be shared with key government agencies.
In a similar vein, the IGT submission observed:
It is clear that the ATO heavily relies on employee
complaints to uncover non-compliance with SG. However, as stated earlier such
complaints are typically not made promptly and result in unpaid SG often not
being recoverable. Accordingly, it is crucial that the ATO considers other
proactive approaches in addressing SG risks at the earliest possible stage.
The IGT noted that one option to bolster the proactive compliance
activities of the ATO would be to conduct more SG specific audits based on risks
identified by the ATO's risk assessment mechanism. As an alternative, the IGT
also suggested that random audits could be conducted (as outlined in the 2010
IGT report), although it noted that the ATO had previously rejected such an
The IGT provided detail on the random audit option:
Whilst carrying out random audits may expose some compliant
employers to unnecessary compliance costs, these costs and inconveniences may
be minimised by the manner in which the ATO conducts these audits... Furthermore,
in light of the earlier discussion on the economic impact of unpaid SG, such
costs and inconveniences should be weighed against the potential disadvantage
that the very same compliant employers face if their competitors do not pay SG
and remain undetected.
On the topic of the costs to employers for random audits, the IGT noted
that one option that could be considered by the ATO is a level of remuneration
or compensation for employers if they were found to be compliant.
The IGT also asserted that random audits may lead to better targeting of
non‑compliant employers in the long term:
Certain common characteristics of non-compliant employers may
be exposed and they could be used to improve the ATO's current risk assessment
tools. As the ATO's current risk assessment processes largely rely on reported
data, these audits may be the only way that the most non‑compliant
employers can be detected. Furthermore, conducting random audits would allow
the SG gap to be more accurately measured.
ATO handling of employee
notifications and resource levels
The committee received evidence noting concerns with how the ATO
responded to employee notifications.
For example, the TCFUA voiced concerns over the ability for an employer
to enter into a payment plan with the ATO for unpaid SG, without the knowledge
or consent of the affected employee.
The TCFUA stated:
Typically in TCFUA's experience, the particular employer
commences making payments under the ATO payment plan, but eventually falls into
significant arrears again, and simply enters into another payment plan. The
pattern is often repeated over years, such that the employee's superannuation
is never up to date. Addressing such compliance 'churning' is time and resource
intensive and rarely leads to final or full resolution.
The TCFUA recommended that it be compulsory for the ATO to notify the
affected employee and gain consent before entering into a SG payment plan with
a non-compliant employer.
The ATO informed the committee that it contacts the individual who
lodged the EN by letter or email at each stage of the investigation to provide
a progress update or outcome.
Another concern raised was the amount of time it took for the ATO to
resolve SG cases, and the lack of information provided to employees about how
investigations into their unpaid SG monies were proceeding.
Cbus observed that many of its members felt as if the ATO was not an
effective player in resolving issues regarding SG arrears. In addition, its
Cbus' experience of the ATO SG compliance area has sometimes
been frustrated by poor communication, extensive time taken in recovery and a
lack of confidence in the willingness of the ATO to pursue arrears given their
policy and resourcing restrictions.
Similarly, the TCFUA informed the committee that many of their members
were frustrated with the slow timeframes of ATO investigations of ENs. Ms
Vivienne Wiles, the National Industrial Officer for the TCFUA elaborated on
It [the ATO] is too slow in a number of respects. It is too
slow to transfer the money to the super fund when it is received. Its
communication with employees is also very poor. It is really common for
employees to not even know that the ATO have even recovered any money. The
reporting from the ATO back to the employee often takes many, many months and
Ms Wiles continued by providing a specific example of significant ATO
We had one case where a number of employees, members of ours,
made complaints to the ATO and they literally heard nothing for three years,
and then they received a letter telling them that the company was insolvent and
had gone into liquidation and the ATO could do nothing further for them. It was
a really significant period... They are really left in the dark, which is ironic
because it is their money ultimately.
As mentioned in chapter 2, according to the ATO, it aims to commence 99
per cent of ENs within 28 days of receipt, and where they proceed to audit,
complete 50 per cent of compliance cases within four months (this
benchmark is currently under review) and 90 per cent of compliance cases within
12 months. The ATO submission pointed out that since 2013, the benchmarks for
all three service standards has been met.
6.1—Employee Notification Service Standards
|EN Service Standard
within 28 days of EN receipt
|Closed within 4 months
Although recognising the work done by the ATO to improve its complaint
response outcomes, JobWatch informed the committee that callers to its helpline
largely perceived the ATO's follow-up action as inadequate, and were
consistently frustrated with a perceived lack of ATO activity in investigating
JobWatch also emphasised that individuals who had lodged ENs often
reported feeling unhappy with their interactions with the ATO:
Anecdotally, many of our callers have complained about
feeling as if they had not been listened to thoroughly by the relevant
authorities, perceiving responses by the ATO as largely scripted and robotic.
While recognising that providing individual updates is a time consuming,
resource intensive process, JobWatch recommended that, as much as possible, the
ATO take steps to personally explain the process of debt enforcement to
The time taken to properly explain the complexities and
difficulties based on a personalised assessment of a complainant's situation
will go some way to ensure that, at the very least, the complainant feels
In regard to ATO resource levels, the Community and Public Sector Union
(CPSU) submitted that its members had observed that the ability of the ATO to
effectively undertake compliance activities (both in terms of the
identification and recovery of unpaid SG) was limited due to the decline of
ongoing staffing levels in recent years.
The CPSU submission further sets out the limitations of the ATO's
Feedback from CPSU members is that due to prioritisation of
resources within the ATO, if an employee notifies that there has been a
non-payment of SG, an audit of all the SG payments by that employer is not
completed until a pattern of non-payment has been established. This forces the
burden of proof onto the employees of the business to establish a pattern of
behaviour, rather than a problem being identified by the compliance area within
On the matter of resource levels, the ATO informed the committee that
the majority of resources for SG activities sit within the Superannuation
Business Line, with support services provided by client accounts services, law
design and practice, and customer service and solutions. The ATO stated that
the fulltime equivalent (FTE) number and proportion of staff working on SG
within the Superannuation Business Line remained at a similar level in 2016-17
as it had in 2015-16. The Superannuation Business Line currently has
approximately 350 FTE employed in active compliance, and of the work undertaken
by the active compliance staff, 170 FTE are involved in SG.
A graph of ATO SG resourcing indicated, however, that the FTE levels for
SG resourcing had dropped from a peak of well over 600 FTE in 2012-13 and 2013‑14,
to approximately 500 FTE in 2015-16.
Figure 6.1—ATO Superannuation Guarantee resourcing, 2010-11
The Association of Superannuation Funds of Australia (ASFA) recommended
that the ATO be provided with additional funding to conduct an increased number
of SG specific audits of high-risk businesses.
The committee understands the concerns raised by submitters about the
challenges and limitations inherent in the ATO's current SG compliance
approach. In particular, the committee recognises that delays in the
investigations of employee notifications, as well as a lack of information on
the progress of an investigation, can cause significant frustration to
individuals awaiting an outcome on their unpaid SG complaint.
The committee recommends that the ATO continue to improve its
communication process with individuals to keep them promptly and meaningfully
informed of the progress of their employee notification.
Additionally, the committee is very concerned by evidence indicating
that the ATO is able to enter into payment plans with non-compliant employers
without informing the employee in question, whose money is being recovered.
The committee recommends that before entering into a payment plan to
recover SG from a non-compliant employer, the ATO be required to notify the affected
employee and gain their consent to the course of action.
The committee has serious reservations about the ATO's reactive approach
to SG compliance. The committee sees benefits in the ATO rebalancing its current
approach to SG compliance by increasing its focus on more proactive methods.
The committee urges the ATO to continue to move away from the current reliance
on employee notifications to trigger compliance activities.
The committee recommends the ATO give consideration to more proactive SG
initiatives, such as the options put forward by the Inspector‑General of
Taxation to incorporate random audits into its SG compliance activities.
The committee is aware that taking a more proactive approach, or
providing more detailed updates to complainants will necessarily require
further ATO resources. The committee notes that ATO SG resourcing levels in
terms of FTE numbers appear to have been reduced by a significant amount since
The committee recommends that the government review ATO resource levels
to ensure that the agency is well-equipped to undertake effective and
comprehensive compliance activities to combat SG non-payment.
The role of third parties in detecting and recovering unpaid SG
Some superannuation funds choose to take an active role in enforcing the
payment of their members' SG.
For example, as mentioned in chapter 2, Industry Fund Services (IFS) provides a
range of services to not-for-profit superannuation funds. IFS stated that its
unpaid superannuation division, which specialises in the recovery of SG
(including arrears collection, enforcement and participation in insolvency
proceedings), acts on behalf of nine superannuation funds.
IFS noted that a fund may appoint IFS as their agent at any point in the
SG collection process and outlined:
Some client funds utilise all of IFS's services while others
undertake arrears collection in-house (or at their outsourced administrator)
and rely on IFS for legal enforcement and/or insolvency proceedings only. IFS
has five funds representing more than 5.1 million accounts that utilise the
full suite of unpaid superannuation services.
ISA informed the committee that in the absence of an award or another
kind of industrial agreement requiring the payment of a specific superannuation
amount, the SGA Act may be the only legal instrument imposing a specific legal
obligation on an employer to pay contributions. As such, the enforcement of the
SGA Act relies upon the potential imposition of an SG charge by the ATO. In
these instances, an affected employee or superannuation fund seeking to act on
their behalf are unable to take any action themselves and must instead rely on
ISA noted that in an attempt to bridge this coverage gap, some
superannuation funds have developed deeds of agreement with contributing
employers in nominated workplace default fund agreements that explicitly
provide superannuation funds with the legal standing to act on behalf of their
members. Such agreements provide a record of a formal relationship confirming
that an employer has nominated a default fund and set out the employer
obligations to superannuation fund members.
ISA explained the difficulties that arise without these default fund
When no formal relationship exists between a fund and an
employer, funds have no standing to act on behalf of a member to recover
arrears or enforce debt. Employees who are exercising 'choice of fund' are not
usually covered by these agreements.
Noting the duty of superannuation fund trustees to recover
debts (but the lack of standing that some funds may have due to an absence of
an industrial award, enterprise agreement or an explicit default fund
agreement), allowing employees – or funds acting on their behalf to apply to
the ATO to give standing to recover arrears and pursue a debt would allow funds
to fulfil this duty.
ISA recommended that in order to remedy gaps in the standing of
employees, or those acting on their behalf, to recover unpaid SG from an
employer, consideration should be given to amending the SGA Act to allow an
individual or agent (such as a superannuation fund or a service provider to the
fund) to recover SG shortfalls on application to the ATO. ISA asserted that
this could be achieved in a number of ways, including by permitting the ATO to
delegate an agent (e.g. the superannuation fund or a service provider to them)
to recover unpaid SG on application.
When asked by the committee whether there was a place for superannuation
funds to recover unpaid SG, Mr Mark Korda, a partner at KordaMentha observed:
Obviously, they are incentivised to do that. They want to
look after their members first, but also the more you have the funds under
management the more you can defray your costs – the expense ratio.
The TCFUA informed the committee that unions are unable to make
complaints to the ATO on behalf of individual employees or groups of employees,
and noted that it is a complicated process for employee representatives to
obtain information on behalf of the individuals they represent. The TCFUA also
indicated that while third parties can provide information to the ATO regarding
circumstances of SG non-payment, the ATO does not consider these tip-offs to be
formal complaints (i.e. employee notifications). The TCFUA submitted that this
represented a significant barrier to unions effectively assisting workers in
relation to SG non-payment and recommended that union representatives are acknowledged
as legitimate representatives of affected workers.
JobWatch told the committee that many of its callers are frustrated to
learn that as employees they lacked the standing to sue their employer for
unpaid SG if their entitlements come from the SG legislation and not from a
common law contract, modern award, or registered agreement. As a result,
employees cannot take private legal action and must instead rely on the ATO to
enforce the SG legislation on their behalf.
JobWatch recommended that there be a legislated option for employees to
take private legal action against their employers for unpaid SG, and noted that
this could be done by amending the National Employment Standards contained in the
Fair Work Act to include an entitlement to SG. JobWatch stated that this
would allow employees to issue proceedings to recover unpaid SG, including by
way of the small claims procedure outlined in the Fair Work Act.
The IGT noted that when examining whether the law should be changed to
provide employees better direct access to avenues of redress, consideration
should be given to whether such a legislative change would be an effective
solution when often employees may not have the resources or funds to pursue the
The committee is of the view that third parties could play an important
role in detecting and recovering unpaid SG. The committee believes that the
current arrangement, whereby an individual cannot take private legal action
against their employer if their SG entitlements stem purely from the SGA Act,
The committee recommends that the government consider a legislated
option for employees, or third parties acting on their behalf, such as unions
or superannuation funds, to take private legal action in the relevant courts against
their employers for unpaid SG.
Default fund criteria
Related to issues surrounding the role of third parties in recovering
unpaid SG, the committee received evidence from Cbus recommending that
superannuation funds seeking default status in industry awards be required to
have a rigorous arrears collection process in place. Cbus noted that the
current default fund criteria in the Fair Work Act does not include the issue
of SG compliance, and stressed that only funds with stringent processes in place
for dealing with unpaid SG should be considered when assessing funds for
default fund status.
The committee considers it pertinent that any superannuation fund
seeking default status in an industry award be required to have a proper arrears
collection process in place. This would ensure that a fund member who
encounters unpaid SG is able to access appropriate assistance in recovering the
The committee recommends that superannuation funds seeking default
status in industry awards be required to have a rigorous arrears collection
process in place.
Effectiveness of the SG Charge
As outlined in chapter 2, if an employer does not pay the correct SG
contribution to an employee's nominated fund by the quarterly payment due date,
they may be liable for the SG Charge (SGC), payable to ATO..
An employer subject to the SGC must lodge an SGC Statement with the ATO,
calculate the amount payable, and pay the charge by the due date for the
relevant quarter. The ATO then forwards the shortfall and nominal interest
component to the employee's superannuation fund.
Evidence received by the committee indicated that the ATO is reliant
upon employers self-reporting to trigger awareness of non-compliance cases. As
the ATO submission stated:
The lodgement of an SGC Statement informs the ATO that an
employee has not met their SG obligations. It allows the ATO to follow-up and
ensure compliance and payment.
If an employer does not lodge an SGC statement, the ATO has
powers to raise the SG Charge assessment and the employer can be liable for a
penalty of up to 200 per cent of the charge amount.
It would appear that under this arrangement the ATO only becomes aware
that an employer has not lodged a SGC Statement when an employee lodges an EN,
or if the non-compliance is picked up during ATO initiated compliance
activities (e.g. through SG proactive audits or the analysis of data to
identify SG high risk employers).
Given that only 30 per cent of the cases of SG non-compliance the ATO
looks into are ATO initiated, it could be reasonably concluded that an employer
who does not lodge an SGC Statement does not face a high risk of being detected
by the ATO.
One of the three components of the SGC is a nominal interest amount (currently
set at 10 per cent from the beginning of the period). This component is
designed to compensate an employee for lost investment returns on the unpaid SG
amount. However, ISA asserted that as non-compliant employers obtained a cash
flow benefit from not paying SG on time (for example interest savings on
business loans, credit cards or overdrafts), those interest rate benefits may
in effect offset the nominal 10 per cent interest charge. This in turn reduces
the impact of the SGC penalty on an employer.
ISA also argued that the SGC penalty regime overall does not provide a
strong enough disincentive to non-compliant employers:
On balance, the existing penalty regime for employers who are
failing to meet their SG obligations is not effective. The risk of detection,
by either proactive audit or employee complaint, is very low. The SGC penalty
regime appears to have been designed merely to provide a modest disincentive
for making late payments. It is not a deterrent to employers wilfully ignoring
the SG liability.
The committee is concerned that the SGC regime relies heavily on non‑compliant
employers self-reporting. While the committee acknowledges that many employers
seek to do the right thing and do lodge SGC statements, there are also some unscrupulous
employers who attempt to circumvent the system.
The committee is mindful of the view put forward by the IGT that when
assessing the effectiveness of the SGC, there is a need to strike a balance
between the deterrent aspects of the charge, as well as appropriate
consideration of the employer's circumstances.
However, the committee is of the opinion that the current SGC does not amount
to a strong enough deterrent for employers who purposefully seek to evade their
SG obligations. The committee considers there is a need for stronger penalties
for deliberate and repeated non-compliance as such behaviour severely
disadvantages individual workers, damages the competitiveness of compliant
employers, and ultimately undermines the system as a whole.
The committee recommends that the government review the SGC regime and
its management by the ATO to ascertain whether it is adequate, with a view to
increasing penalties for deliberate and repeated acts of non-compliance by
ATO and FWO compliance responsibilities
The committee received evidence regarding the division of
responsibilities for superannuation entitlements between the ATO and the Fair
Work Ombudsman (FWO) and the impact of this division on SG compliance efforts.
The Department of Employment outlined the role of the FWO in relation to
superannuation entitlements as follows:
Under the Fair Work Act 2009 (FW Act), the Fair Work
Ombudsman (FWO) has limited direct functions relating to superannuation
entitlements, generally confined to providing advice about and enforcing
compliance with modern awards and enterprise agreements requiring employers to
make superannuation contributions, and record keeping and payslip requirements
relating to superannuation contributions.
The FWO responds to complaints of underpayment made by
employees by gathering payment information from both the employee and the
employer. FWO does not have statutory access to payment information from
employers or superannuation funds in the same way as the ATO. Therefore [the]
FWO is not able to proactively monitor SG and in the majority of circumstance,
will forward on complaints regarding SG contribution to the ATO for action...
The FWO has powers to seek court orders for the underpayment
or non‑payment of wages, including court orders for a contravention of a
modern award term or enterprise agreement. If a court finds that an employer
has breached its obligations to pay wages or superannuation, the employer may
be liable to a pecuniary penalty, in addition to repayment of unpaid wages and
unpaid superannuation guarantee contributions.
Mr Michael Campbell, the Deputy Fair Work Ombudsman (Operations),
Our power to enforce a superannuation payment would only
arise through a modern award and it would depend on how that clause is drafted
to determine what our enforcement possibilities would be. If it is specific and
it requires a percentage payment then we can enforce that as part of our
Dr Tess Hardy provided the committee with an example illustrating that
the FWO does have the ability to pursue superannuation entitlements in some
Certainly, although the Fair Work Ombudsman has a practice of
dealing with underpayments of minimum wages and referring the superannuation
shortfall issues to the ATO, there are a number of cases where it has pursued
superannuation entitlements as part of a broader proceeding in relation to
underpayment of wages. It is certainly within their ambit to pursue
superannuation entitlements where, of course, they arise within their
jurisdiction, which is under a modern award, under an enterprise agreement or
as a safety net contractual entitlement. They have done so.
Dr Hardy went on to give a specific example of such a situation:
There was a recent case in the Federal Court of the Fair Work
Ombudsman and Grouped Property services, which involved the underpayment of
wages, various other entitlements and superannuation contributions. There were
48 award-covered employees and three award-free employees. For the 48
award-covered employees the Fair Work Ombudsman was able to seek compensation
for lost superannuation and lost interest. The three award-free employees would
have to rely on the ATO to take action on their behalf. That is kind of an
illustration of the way in which the award coverage has implications for the
Fair Work Ombudsman's jurisdiction and recovery of those underpayments through
The FWO informed the committee that of the formal requests for
assistance finalised by the FWO in 2015-16, approximately 5 per cent (1242
requests) involved a reference to superannuation.
Mr Andrew Fogarty, Executive Director of Policy, Media and
Communications at the FWO clarified that:
...we really structure ourselves at the moment so that, at the
front end, if someone comes to our contact centre, for instance, or calls us,
we are, right at the beginning, referring them to the ATO if their question is
about superannuation or taxation.
When the committee sought further information on when the FWO does act
to enforce SG, Mr Campbell outlined that although the jurisdiction of the FWO
was enlivened when an award provided for a specific percentage SG payment and
it was an award entitlement, in practice, the FWO method of operation was to
refer SG to the ATO. As Mr Campbell noted 'they [ATO] have a broader coverage
and greater powers to conduct this work and, ultimately, it is more effective
than our seeking to do it.'
Mr Campbell went on to provide the committee with further detail around
the approach of the FWO to superannuation non-payment:
In simple terms, the work we focus on is that which is
clearly within our jurisdiction. The ATO has a broader jurisdiction than ours.
It reaches more employees and employers and it has a better toolkit and set of
powers to seek out and recover unpaid superannuation. So we refer it to them
and we think that is an appropriate approach. It is not that we do not
prioritise or think that it is important, but the mechanism that we have in
place works. That is how we treat that work.
When questioning other witnesses on what might be behind the apparent
reluctance of the FWO to engage in the superannuation compliance issues, the
committee received the following evidence:
Chair: In your view, what explains the Fair Work
Ombudsman's reluctance to engage in this area? Are there some administrative
difficulties for them which make it easier for them to refer to the ATO or is
it simply that the ATO is recognised within government as being the relevant
enforcement agency? Is there something other than just an informal division of responsibilities?
Dr Hardy: I certainly think there is the perception
that the ATO is the principal regulator in this space. The other obvious issue
would be one of resources. The more time they spend on enforcing superannuation
entitlements, the less resources they have for addressing other issues that
they might perceive as more squarely within their jurisdiction or not within
someone else's jurisdiction.
The memorandum of understanding between the ATO and the FWO as it relates
to information sharing between the two agencies is covered in chapter 7.
The committee is of the view that the FWO should be more active in the
SG compliance space. Rather than simply referring SG matters to the ATO, the
committee believes that the FWO should actively assist employees in resolving
unpaid SG matters where appropriate under their jurisdiction.
The committee recommends that the ATO review all current compliance and
recovery activities related to unpaid SG to determine which ones should remain
with the ATO, and which ones could be transferred to, or shared with, the Fair
Work Ombudsman. As a starting point, the committee recommends that the Fair
Work Ombudsman begin to receive and act on SG non-payment complaints where
appropriate, rather than simply referring the affected employees to the ATO.
The committee recommends that the government consider increasing the
resource levels of the Fair Work Ombudsman to ensure it is properly equipped to
carry out any additional SG compliance or recovery activities it may acquire
from the ATO.
Unpaid SG in the event of insolvency
Employer insolvency poses a serious challenge to the payment of SG. In
addition to the loss of wages, annual leave and other redundancy entitlements,
the loss of unpaid SG is of great concern to affected employees, particularly
in a situation where SG entitlements have not been remitted for a significant
period of time, if at all.
As Professor Helen Anderson and Dr Tess Hardy noted in an academic
article in the UNSW Law Journal submitted by Dr Hardy part of her submission:
Corporate insolvency exacerbates the recovery of unpaid
employment entitlements, including any unremitted superannuation contributions,
because the main target of enforcement action – the company– is likely to have
insufficient assets to meet the claim.
JobWatch stated that many of its callers reported being dissatisfied
with their inability to recover unpaid SG when their employer had gone into
liquidation or been declared bankrupt. JobWatch also stated that in some
situations, although an employee had lodged an EN with the ATO before their
employer's bankruptcy or liquidation, by the time the ATO conducted an
investigation the insolvency process had already begun. JobWatch noted 'the
lengthy and secretive investigation process for recovery through the ATO is
inadequate in these situations as rapid resolution is essential to prevent
employee entitlements from being subjugated by other creditors'.
According to the ATO's submission, 36 per cent of EN cases were raised
against employers displaying an insolvency indicator on ATO systems, which made
debt collection unlikely. This in turn meant that the ATO was generally unable
to collect any SG payment for affected employees.
In addition, the ATO observed that due to the time lag in reporting the
non-payment of SG contributions, insolvency was a significant issue in the
recovery of SGC debt, with $113.2 million irrecoverable at law in 2015-16.
Effectiveness of Director Penalty
The ATO informed the committee that administrative improvements to the
recovery of unpaid SG could potentially be achieved by improving the systems
that support the issuing of Director Penalty Notices (DPNs) . Since
2012, the Director Penalty regime (enacted through Division 269 of Schedule 1
of the Taxation Administration Act 1953) has been applicable to company
SGC liabilities. As a result, the ATO Commissioner is able to recover SGC
liabilities by pursuing a parallel liability imposed on the company directors
in the form of a penalty.
For example, the ATO would issue a notice requiring a director to pay
any unpaid SG, and if the director did not comply with the notice by the due
date, the director becomes personally liable for the penalty amount until it is
paid in full.
However, the effectiveness of this framework is limited in situations
involving an insolvent company. For example, if the ATO sends a DPN to the
director of an insolvent company, the director is able to escape personal
liability by simply liquidating the defaulting company within 21 days of
receiving the notice. This means that any unpaid SG amounts are not
The ATO elaborated on this point:
...the liquidation or voluntary administration of the company
automatically extinguishes any director penalty which was not already the
subject of a Director Penalty Notice (s 269-25 of the TAA [Taxation
Administration Act 1953]) issued more than 21 days prior to the
commencement of the insolvency administration or where the associated SGC
liability was not reported for more than three months at the time that the
administration commenced. Given that the reporting date for SGC is two months
following the end of the quarter, it is often the case that the eventual
liquidation of the company extinguishes the director penalties related to the
past eight months of the company's unpaid superannuation obligations.
Similarly, in an article in the University of New South Wales Law
Journal by Dr Tess Hardy and Professor Helen Anderson, the two academics
outlined their concerns with the adequacy of the DPN system:
Companies wishing to avoid these (and possible other)
liabilities can simply liquidate or enter voluntary administration before three
months has elapsed without reporting or paying their SGC liabilities. In such
circumstances, the directors will face no personal consequences, even if the
ATO later identifies the lack of superannuation payment. The business may then
be reborn through a 'phoenix' company and the behaviour continues.
The committee is concerned by the apparent deficiency of the current DPN
framework as it relates to unpaid SG by companies that become insolvent. The
committee is of the view that this unintentional loophole must be urgently
addressed in order to stop unscrupulous employers from engaging in fraudulent
phoenix activity and avoiding their superannuation obligations.
The committee recommends that the government investigate potential
legislative amendments to strengthen the ATO's current ability to recover SGC
liabilities through the Director Penalty Notice framework in order to stop
company directors undertaking fraudulent phoenix activity and avoiding their SG
Impact of illegal phoenix
Phoenix activity is generally based upon the failure or abandonment of
one company, only to have a second company 'rise from the ashes' of the first,
with the same controllers and business. Such activity is illegal when, in a
breach of directors' duties, the intention of the company's controllers is to
shed debts while continuing what is essentially the same business through the
new entity. The non-payment of taxes and employee entitlements, including SG,
is often the core objective of illegal phoenix activity.
A February 2017 report by Professor Anderson and colleagues at the
Melbourne Law School entitled 'Phoenix Activity: Recommendations on Detection,
Disruption and Enforcement' recommended the use of director identification
numbers (DIN) for all company directors to allow ASIC and other regulators to
monitor and track repeat offenders engaging in illegal phoenix activity.
It is currently possible to register an Australian company by simply
providing ASIC with the name, address and date of birth of each proposed
officeholder. ASIC does not ask for the prior corporate history of the proposed
directors, nor does it independently verify the information provided to it.
This is problematic as repeat offenders in illegal phoenix activity can attempt
to conceal their previous multiple directorships under the guise of a 'dummy
director' (for example, by providing the name of a relative or fictitious
character, deliberately misspelling their name, or listing an incorrect date of
To combat this behaviour, Professor Anderson's report proposed the
following details for a DIN scheme:
The limitations of the existing company registration
requirements could be overcome through the relatively simple and cheap process
of requiring directors to establish their own identity via 100 points of
identity proof, which would accord with the well-accepted and uncontroversial
practice for opening bank accounts and obtaining passports. Directors would
then be allocated a unique DIN, which would enable tracking of company
directors who have been involved in multiple corporate failures and who may be
likely to engage in armful phoenix activity.
In her inquiry submission Professor Anderson also suggested that a DIN
scheme could assist credit reporting agencies in acting as market-based regulators.
If given information about unremitted SG and those directors responsible for it
(identified through the DIN), credit reporting agencies could in effect make it
more difficult for unscrupulous directors to obtain finance for their future
The Australian Restructuring Insolvency and Turnaround Association
(ARITA) informed the committee that it supported a DIN scheme as set out in the
research by Professor Anderson, noting that it is a policy they have strongly
advocated for to reduce instances of illegal phoenix activity.
The committee considers that a DIN initiative has merit as it would go
some way to preventing directors engaging in illegal phoenix activity and
repeatedly avoiding SG obligations with impunity. The committee also considers
that the potential for a DIN initiative to assist credit reporting agencies in
identifying individuals who engage in illegal phoenix activity is worth further
The committee recommends that the government consider implementing a
Director Identification Number scheme to prevent individuals engaging in
illegal phoenix activity and repeatedly avoiding SG obligations.
Impact of trusts on unpaid SG
The committee received evidence indicating that the method in which an
employee is employed (i.e. via a company structure or via a trust) can impact
the priority of employee entitlements during the liquidation of a company. This
in turn impacts on the ability for employees to recover unpaid SG amounts.
ARITA informed the committee that in the event of the liquidation of a
company, employee entitlements (such as unpaid SG) are given priority over
ordinary trade creditors. ARITA observed, however, that recent court decisions
have determined that if the business is traded and employed through a trust,
all creditors rank equally when it comes to the distribution of available
Specifically, if a business is operated through a trust structure, it is
outside the operation of section 556 (relating to priority payments) of the Corporations
Act 2001 (Corporations Act).
ARITA provided the committee with the following example to explain the
impact on the recovery of unpaid SG amounts of employees of an insolvent
...if a butcher trades using a company structure, employee
entitlements owing to the apprentice would be paid in priority to the debts
owing to the butcher's meat supplier. If the same business was instead traded
through a trust structure, the apprentice and the meat supplier would rank
equally. Where there are insufficient funds available to pay all outstanding
amounts, this reduces the amount of outstanding entitlements that the employee
would receive, including any superannuation...
In a submission in his private capacity, Mr Geoff Green, a chartered
accountant and former registered liquidator, argued that as the use of
discretionary trusts is widespread in commercial practice, many thousands of
employees could be impacted. Mr Green stated that if the level of protection
afforded to employee superannuation and other priorities is dependent on the
type of structure used by the employer, then in practical terms it was firstly
inequitable (because there is no business or commercial justification for such
a difference); and secondly impractical (because employees cannot be expected
to identify the type of structure by which they are employed, or to understand
the consequences of the structure).
Mr Green suggested that a solution to this problem would be to amend the
Corporations Act so that section 556 priorities apply in all
liquidations. Mr Green noted that this would implement the recommendation set
out in paragraph 265 of the Australian Law Reform Commission's 1988 Harmer
Mr Green also observed that as an alternative to amending section 556 of the
Corporations Act, a new provision that operates to create priority for employee
entitlements and SG debts ahead of trust creditors (in the same way that
section 561 currently gives priority to employee entitlements and SG debts
ahead of circulating security interests) could be created. In addition, Mr
Green noted that any changes should be drafted to allow for the possibility
that corporate entities might be the trustee of more than one trust, or might
also employ staff in their own right.
The committee considers it inequitable that individuals employed in
businesses operating through a trust structure with unpaid SG are not
considered to have priority over ordinary creditors in the event of employer
The committee recommends that the government consider amending the
Corporations Act to ensure that the priorities in section 556 apply during all
liquidations, regardless of whether the business being liquidated was operated
through a trust structure.
Other issues relating to payment
and calculation of SG during liquidation
The committee received evidence on other issues relating to the payment
and calculation of SG during liquidation processes.
For example, ARITA highlighted the inconsistency in the calculation of
the nominal interest component of the SGC between the SGA Act and the
Corporations Act. ARITA stated that under the Corporations Act, creditors are
entitled to include interest up to the date of liquidation in their claim, if
the terms of their debt provide for interest to accrue. However, when the ATO
calculates the nominal interest of the SGC on unpaid super, the nominal
interest is calculated up to the date of lodgement of the SGC statement. This
date of lodgement is generally after the date of liquidation.
ARITA argued that this inconsistency could potentially disadvantage
other creditors in the liquidation due to the priority status of the SGC
In our view, this is inappropriate, as creditors in the
liquidation should enjoy the same rights and privileges unless specifically
differentiated by the Corporations Act... In our view, all interest should be
treated equally and the right to interest should be calculated as at the date
ARITA also informed the committee that feedback from its members showed
there were often lengthy delays between when an SGC payment is made to the ATO
as part of an insolvency process, and when those funds are remitted to an
employee's superannuation fund. To solve this, ARITA suggested that power be
given to insolvency practitioners to pay dividends for unpaid SG directly to an
employee's superannuation fund (where details of the fund are known). Any
payments could then be reported to the ATO, and the associated administration
component of the SGC be paid directly to the ATO.
The committee is of the view that both these issues warrant further
investigation in order to ascertain whether any changes could be made to allow
employees to promptly receive their SG entitlements in the event that their
employer becomes insolvent.
The committee recommends that the government consider amending the SGA
Act so that nominal interest on SGC in the case of insolvencies apply up to the
date of liquidation, in alignment with other creditors as set out in the
The committee recommends that the government consider amending the SGA
Act to allow insolvency practitioners to pay outstanding SG contributions
directly to an employee's superannuation fund.
Fair Entitlements Guarantee scheme
The Fair Entitlements Guarantee (FEG) is a publicly funded safety net
scheme of last resort designed to protect accrued basic employment entitlements
administered by the Department of Employment under the Fair Entitlements
Guarantee Act 2012 (FEG Act). FEG commenced as a legislated scheme in
December 2012, replacing the previous administrative version of the scheme, the
General Employee Entitlements and Redundancy Scheme (GEERS).
FEG allows employees who have lost their jobs due to the liquidation or
insolvency of their employer and who are unable to recover particular
entitlements, to apply to receive financial assistance, with all payments
subject to a capped weekly amount.
Unpaid SG is specifically excluded from FEG. The five basic employment
entitlements covered under the scheme are as follows:
unpaid wages (capped to 13 weeks)
unpaid annual leave
unpaid long service leave
payment in lieu of notice (capped to five weeks)
redundancy pay (capped to four weeks per full year of service)
The Department of Employment provided the committee with some background
on the policy design of FEG:
In policy design, FEG and its predecessor schemes were not
intended to be an all-encompassing form of insurance to compensate employees
for any and all unpaid amounts owed by their employer. The design of FEG
provides for protection of limited categories of 'employment entitlements'
aligned to those entitlements that an employer is obligated to provide in the
National Employment Standard under the Fair Work Act 2009.
The Department of Employment also elaborated on why SG was not covered
Despite the earlier commencement of Australia's compulsory
employer superannuation regime, unpaid compulsory superannuation contributions
owed by an insolvent employer have never been included in the policy design of
FEG or its predecessor schemes. Superannuation has a different policy genesis
and intent than the employment entitlements covered under the FEG. Employer
superannuation contributions under the Superannuation Guarantee (SG) are not an
item paid directly to employees as they fall due, nor do they become payable directly
to an employee on redundancy. Rather, SG contributions are accumulated in a
superannuation fund and accessed at a later time on an employee's retirement
from the workforce.
The Department of Employment also stated that the FEG scheme presents a
'moral hazard' as it potentially shifts the cost of employer accountability for
employee entitlements obligations to tax payers. The department noted that as
FEG has become more generous over time, the moral hazard risk that insolvent
employers rely on the scheme to meet employees entitlements has increased.
Numerous submitters recommended that FEG be expanded to cover unpaid SG.
For example, Cbus, the ACTU and United Voice all recommended that consideration
be given to expanding FEG to include SG entitlements.
ISA argued that even though an expansion of FEG to include SG would
create costs to government, these costs may be offset over time through a
decrease in the number of affected employees reliant on the age pension years
later. ISA also stated that including SG in FEG would create an incentive for
government to administer an effective SG compliance regime.
JobWatch informed the committee that although superannuation and wage
entitlements have equal standing in insolvency legislation when it comes to prioritising
payments, if an employee is unable to access superannuation due to employer
insolvency, there is no other option for remuneration available to them.
The Association of Super Funds Australia (ASFA) recommended that unpaid
SG entitlements be included in the unpaid employment entitlements covered by
FEG. ASFA stated that there was merit in reviewing the treatment of unpaid SG
entitlements in insolvency cases as, according to ASIC data, a substantial
number of insolvency cases involved unpaid SG entitlements.
The Association of Financial Advisors (AFA) pointed out that unpaid SG
liability can be a cause of employers entering insolvency arrangements in the
first place, meaning employees could potentially miss out on substantial sums
of retirement funds rightfully owed to them. AFA suggested that the FEG scheme
be reviewed to consider the protection of SG entitlements in liquidation.
The committee also received evidence from the IGT indicating that the
inquiry was not the first time that the expansion of the last resort employee
entitlement scheme has been canvassed. In the 2010 IGT Super Guarantee Charge
review, the IGT recommended an expansion to both GEERS and the Director Penalty
Notice (DPN) regime to cover unpaid SGC liabilities.
The recommendation read as follows:
To better protect employees' SG entitlements and improve both
deterrence against SG non-compliance and provide greater transparency of the
cost of SG non-compliance on future age pension outlays, the Government consider:
Expanding the director penalty regime to apply to unpaid SGC
liabilities of the company; and
Expanding GEERS to cover unpaid SGC liabilities where a company
has been placed into liquidation and the ATO has not been able to recover
against the directors personally.
Although the suggestion to expand GEERS was not actioned, the DPN regime
was expanded to include unpaid SGC liabilities in June 2012. As a result of
this, if a company fails while owing SG to employees, directors of the company
may become liable for any unpaid superannuation entitlements. The policy intent
behind the expansion was to establish a deterrent against non-compliance and
improve the ATO's ability to recover unpaid SG even after a company had been
However, according to the IGT submission, this expansion was supposed to
be complemented by an expansion of the last resort employee entitlement scheme:
The IGT explained in his 2010 SGC Review that the expansion
of both DPNs and GEERS to cover unpaid SGC complementary. Where a company has
not met their SG obligations, the ATO should have the ability to recover unpaid
SGC amounts from the directors of companies personally. Only when the ATO has
not been able to recover unpaid SGC liabilities from the company and the directors
should GEERS, now FEG, cover unpaid SG.
The Department of Employment (the department) argued that FEG not be
expanded, asserting that notwithstanding the availability of FEG as a last
resort safety net, the government had clearly stated that it is the
responsibility of an employer to meet its employee entitlement obligations. The
department also stated that taxpayers should not have to provide a
comprehensive and unlimited source of funding to compensate employees where the
employer fails to make adequate provision for the accrued entitlements of its
The department asserted that including unpaid SG contributions in FEG
significantly increase the cost of the scheme;
exacerbate the existing moral hazard inherent in the scheme; and
create unnecessary policy and administrative complexity.
In particular the department argued that expanding FEG to include unpaid
SG would result in an increase of around 47 per cent in the number of claims to
the scheme. This would in turn result in additional administered expense for
the government, which the department estimated to be $801 million over the
forward estimates. The department also claimed that changes to business systems
would be needed to administer assessment and payment of the superannuation
component of claims, at a cost of an extra $39 million to departmental expenses
over the forward estimates.
The following table was provided by the department to illustrate the
Table 6.2—Summary of additional expenditure flowing from an
expansion of FEG
Administered expense (million)
Departmental expense (million)
The department also flagged that expanding FEG would require legislative
amendment to the FEG Act, as well as possibly the SGA Act and other
It can be anticipated that significant complexity will be
encountered in effectively straddling the overlap between FEG and the ATO in
managing non-payment of SG contributions. The ATO already has regulatory and
compliance responsibility for SG contributions. Including SG contributions in
FEG will work at cross purposes to the existing compliance regime including the
SG Charge arrangements, possibly resulting in a higher level of non-compliance.
Rather than expanding FEG, the department recommended that the committee
consider measures to strengthen the powers available to the ATO to manage SG
compliance. The department stated that expanding FEG to include SG would not
likely achieve the desired result of improving compliance in employers meeting
their ongoing SG obligations.
The committee is mindful of the concerns put forward by the Department
of Employment in regard to the additional expenditure that would be required to
expand the FEG scheme to cover unpaid SG entitlements. The committee is aware
that any change to FEG would need to be carefully considered and undertaken
only when there is scope in the federal budget to adequately fund it.
However, as mentioned earlier in this report, the committee is strongly
of the view that SG forms an integral part of an employee's remuneration and is
akin to deferred wages. As such, the committee does not agree with the
Department of Employment's argument that the different policy genesis of
superannuation, as well as the fact that SG is not paid directly to employees
as it falls due, nor payable directly to employees on redundancy, are valid
reasons for excluding SG from the FEG scheme. The fact the SG contributions are
deferred wages does not diminish their importance. The FEG scheme has always
covered unpaid wages, and therefore it is logical that SG, as deferred wages,
should also be covered.
Additionally, the committee notes that although including SG in the FEG
scheme would increase current costs to government, the likelihood is that
government expenditure would instead be decreased in later years due to a
reduced reliance on the age pension from those affected employees. The
committee is also of the view that if the ATO undertakes more proactive work to
prevent SG non-payment as recommended, this will partially offset the increased
costs to the FEG scheme should SG be included.
The committee recommends that the relevant government agencies undertake
further research into the fiscal and legislative impacts of an expansion of the
current Fair Entitlements Guarantee scheme to cover unpaid SG entitlements.
Navigation: Previous Page | Contents | Next Page