Labor Senators do not support the Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019.
This bill suffers the same defects as the Treasury Laws Amendment (2018 Superannuation Measures No.1) Bill 2018. The issues raised by Labor Senators in our dissenting report during the inquiry into that bill remain unaddressed in this present bill.
Currently, if an employer fails to pay their super guarantee in a quarter they are liable to pay a SG charge. The SG charge consists of the SG shortfall, interest on the shortfall amount (charged at 10 per cent per annum, paid to the super account) and an admin fee to the Australian Taxation Office (ATO) of $20.
This bill seeks to provide a one-off amnesty to employer's who disclose and pay off the employee's full entitlement (SG charge).
If an employer makes payment on the SG charge or contributions during the amnesty period, this bill allows the employer to claim tax deductions for payments of the SG charge or contributions, as well as reducing
non-compliance penalties and fees to nil.
The amnesty period is from 24 May 2018 and will end six months after this bill receives Royal Assent
Non-compliance of the superannuation guarantee is a form of wage theft. When an employer forgoes paying superannuation to their employee, they are taking what was legally owed to them.
As explained by Ms Jo-Anne Schofield, National Secretary of United Voice:
Superannuation is deferred wages. It's negotiated and agreed between unions and employers. Non-payment of superannuation, estimated at nearly $6 billion a year, is, in our submission, a form of wage theft.
Wage theft from the non-compliance of the superannuation guarantee is a significant problem as Industry Superannuation Australia (ISA) explains:
…ISA research shows that the problem of unpaid super has increased 25 per cent in the three years since 2013-14, with 2.85 million Australians being short-changed just under $6 billion in super entitlements in the 2016-17 year alone.
Examples provided in the hearing from witnesses including United Voice and the Australian Council of Trade Unions (ACTU) support the view of Labor Senators that the most vulnerable workers are likely to fall victim to wage theft.
During this inquiry, a number of explanations were presented as to why this bill falls short.
Amnesty sends the message that wage theft is acceptable
The inquiry made clear that the amnesty seeks to reward bad behaviour over good behaviour. This bill would not penalise wage theft—instead, it would reward it by allowing employers to make deductions. Furthermore, it punishes employers who are doing the right thing, by allowing their competitors to gain a competitive advantage through non-compliance. It may also be perceived by non-complying employers that another amnesty may be made available in the future.
This was a point reinforced by the Australian Institute of Superannuation Trustees (AIST):
Beyond that, it will actually send the wrong message to people who have done the right thing. That's one of the ongoing and underlying risks of having an amnesty—that your good employer will potentially be discouraged if they are ever in a situation again where they might be tight for cash, and they think, 'Okay, we'll just hold off on super, because evidence shows that there will be an amnesty and then maybe another amnesty'.
The amnesty sends a message to law-breaking employers that they will be protected from the consequences of the law.
Employee representatives also share this view and are perplexed as to the signals this sends to businesses that have done the right thing. AIST were particularly critical:
The issue is that it says to good employers, 'There is no reward for you doing the right thing.' In fact, by allowing this amnesty to occur, poor employers who have held that cash back and used it for other purposes are being rewarded. That level playing field is one of our major concerns. It creates a situation where you are rewarding bad employers and punishing good ones.
If the amnesty were to pass, there is potential that the message to those who break the law that there is a benefit for doing the wrong thing, as the ACTU stated:
The bill to give an amnesty from penalties and a tax deduction to employers who have not paid their employees' superannuation entitlements for the past 26 years is really remarkable in its audacity, from our perspective. It says to every employer who didn't pay super to their staff on time that that's okay, so long as it occurred before March last year. It also says to the vast majority of employers—who did pay the super, did obey the laws of this country and did bother to do the right thing by their employees—that perhaps they really shouldn't have bothered at all.
These views were supported by United Voice, who shared concerns that complying businesses are penalised out of the market:
In our submission, amnesty sends the wrong message, especially in sectors where our union is active, such as contracting industries. In these sectors, non-compliant employers can and do acquire market share from those companies that are meeting all of their award and superannuation obligations to their workers. The compliant companies are effectively undercut. They are penalised out of the market for doing the right thing.
Ms Schofield, from United Voice, went on to say:
On the other hand, non-compliant companies make a gain. Due to the amnesty, those companies will escape penalties that would otherwise apply to them. It sends a signal in markets such as contracting sectors that practices of noncompliance can be overlooked through future amnesties. We believe this would send the wrong message in sectors where we have members. It would effectively let non-compliant employers off the hook. In these instances and all others, amnesties are completely counterproductive and can reduce compliance in the future.
Labor Senators cannot support the double standards this amnesty will create. The bill simply creates a scenario where employer theft is acceptable and rewarded, while employee theft is treated as theft. The ACTU stated in their evidence:
That really gets to the crux of this proposal: it introduces a double standard on workers and their entitlements. Fundamentally, if workers were to steal from their employers, they'd face jail, lose their jobs and face significant penalties to their livelihoods. Workers face fines and penalties for exercising the right to strike under our systems. But, under this proposal, employers who refuse to comply with the law get a free kick from their legal compliance and their obligations, and they get a tax deduction to boot.
There is a view that the amnesty will bring forward employers who have simply made errors, however the view from United Voice is that usually those employers rectify the issues immediately, whereas the vast majority have deliberately engaged in wage theft as they state:
I would also reiterate that it's our experience that, where there is an error due to misclassification or oversight, it is quickly rectified, with cooperation from the union. But, in our experience, superannuation theft is deliberate and it is systemic in some sectors.
Labor Senators cannot support a bill where wage theft is normalised and potentially promotes employers to engage in wage theft as a form of competitive advantage. This bill does not send the right message to employers who do the right thing and employees who are victims of wage theft.
Amnesties are ineffective
The evidence to this inquiry mirrored the evidence to the inquiry in the previous iteration of the bill in its view that amnesties are ineffective. As discussed in this dissenting report, amnesties can create an expectation that future non-compliance will also be overlooked.
AIST quoted from research conducted by Bayer, Oberhofer and Winner, which indicated that amnesties are only modest in benefits, self-fulfilling, and future amnesties are anticipated:
Policymakers often view tax amnesties as an efficient policy device to exploit additional revenue sources (at least in the short run) and, in the middle to long run, to improve tax compliance. However, empirical and anecdotal evidence shows that the benefits of tax amnesties are only modest and in many cases do not exceed the costs of such programs (see, e.g., Baer and Le Borgne 2008). Our theoretical model and the corresponding empirical findings provide one possible explanation for this observation, suggesting that amnesties are self-fulfilling in the sense that initial compliance gets worse if taxpayers expect that an amnesty will be coming along soon. In other words, anything that increases the believed probability of a tax amnesty reduces initial revenues and in turn reinforces the government’s need to enact an amnesty. Consequently, governments should think twice before calling an amnesty as a quick fix for a budgetary shortfall, as it might increase the pressure on future budgets, since taxpayers then anticipate future amnesties. Hence, it might be worth introducing commitment devices such as legislation that allows governments to credibly commit not to enact amnesties, which would improve tax compliance and prevent self-fulfilling beliefs from forcing governments to use amnesties regardless if they like them or not.
AIST also quoted from Alm and Martinez-Vazquez, which supports the view that amnesties send the wrong message to employers doing the right thing:
If honest taxpayers resent the special treatment of tax evaders, then their compliance may decline. Further, if individuals come to believe that the amnesty is not a one-time opportunity, then they may reduce their current compliance in anticipation of another, future amnesty.
Using the research from Alm and Martinez-Vazquez, AIST presented the view that amnesties can produce negative social norms:
A tax amnesty gives individuals an opportunity to pay previously unpaid back-taxes without being subject to the penalties that the discovery of evasion normally brings. Such amnesties may reduce compliance if honest taxpayers resent the tax forgiveness given to tax cheats (and if individuals believe that the amnesty may be repeated again).
Employers are not compelled to keep records beyond a time period
There is a real concern that the amnesty may not bring to light instances of non-compliance, as records may not be kept beyond the mandatory five-year record keeping period. The ATO stated:
…the recordkeeping requirements after a period are certainly not compelled to be kept.
Consequently, very few employers who have engaged in wage theft coming forward beyond the five-year period. As Mr David Haynes, Senior Policy Manager at AIST, stated:
…I would suggest that very few employers would own up to noncompliance prior to 10 years ago—that is, periods for which there isn't a requirement to maintain historic data.
It is the view of Labor Senators that employers may use the amnesty to clear their record for only the five-year period, even though having engaged in wage theft beyond the mandatory record keeping period. This view was supported by Mr Connolly from the ACTU:
Senator GALLACHER: This amnesty may well cover a 26-year period, but if people turned up with five years' worth of records and pay for the five years they've got records for, the slate is wiped clean. Is that it? Does anybody know that level of detail about this legislation?
Mr Connolly: That's our understanding of this proposal. If you meet the requirement of coming forward within six months of the legislation being enacted, provided it's within the period of March 2018 and the operative date of the bill as it would be passed, then any underpayment within the period since the introduction of the SG would be covered. That's your leave pass.
Ignorance is no excuse
This bill will assist businesses who were non-compliant due to ignorance of their obligations or due to administrative error. This notion was fundamentally rejected by the ACTU:
The amnesty is based upon the proviso that businesses may have been ignorant of their obligations, or inadvertently missed payments due to an administrative error. In every other circumstance, ignorance of the law is not a defence.
The ATO does not have the power to waive the administrative penalty
Labor Senators are concerned that the Commissioner of Taxation may not even have the power to waive or not apply the administrative penalty of $20, as envisaged by the bill:
Mr O'Halloran: It is to my knowledge, and I've reasonably checked. The only nuance in that is, of course, that probably—it's certainly not for me to speak to the policy design—the superannuation guarantee has some nuances where the commissioner has no discretion, particularly around the remission of what's termed the 'administrative penalty'. It's quite hard coded, and so therefore it couldn't be done administratively.
Senator GALLACHER: That was brought forward in evidence before a previous estimates session as the waiving of the $20 penalty per quarter. You didn't have the power to waive that, although you had waived it. Is that essentially the situation?
Mr O'Halloran: Yes. As I gave in evidence at the time, for a period of six to 12 months we certainly did do that, but , when I checked some legal advice, I found that it wasn't appropriate and certainly stopped it as soon as I could. That's the same evidence I've given previously.
Senator GALLACHER: Fair enough. I'm not sure the $20 penalty was all that much of an incentive for people to comply anyway, as it?
Mr O'Halloran: There's a range of users in a practical sense. I draw to the committee's attention, of course, that the $20 is per employee per quarter, so it can have a large multiplier effect. Like most things in life, it might sound okay until it's the money you have to pay, but it can have quite a significant effect even relative to the shortfall.
Senator GALLACHER: Correct me if I'm wrong, but my understanding of this legislation is that that penalty will be waived in its entirety.
Mr O'Halloran: That's correct. It will be waived or not applied. The commissioner will not be forced by legislation to apply.
The bill seeks to only recover a small amount compared to the actual problem
Even if the scheme is able to perform as the government envisages, it will only recover a small amount of unpaid superannuation. This is a view supported by AIST:
The evidence suggests, even as the government's estimates themselves suggest, a fairly low level of payment.
The ACTU pointed out that the amount was nothing more than 'a drop in the ocean' and went on to state:
When you compare that to the size of this problem, that's just three per cent of one year's unpaid superannuation, by ISA's estimate. What would be recovered is just 1.1 per cent of the size of this problem over the three years to 2017.
Labor Senators believe that every single dollar is important, however this bill risks sending the wrong message to employers that wage theft is acceptable. That is why alternate measures to recover unpaid superannuation must be considered by government.
There are better solutions. Throughout the hearings the committee heard alternative schemes to return stolen superannuation contributions. Many believe that Single Touch Payroll will play a significant role in the future. However, regarding there is a strong view that strategic audits from the tax office are an effective way of addressing historic non-payment of superannuation.
The ACTU supported the ATO gaining additional resources to audit contributions, undertake enforcement action and use existing penalty powers available under the Act. Additionally, the ACTU supported individuals and unions having the power to inspect wage and superannuation records.
The ATO indicated that they already undertake a significant program of retrospective strategic audits:
On your compliance question: we certainly have a relatively large audit program. I'll just run through some context, if that's useful, but I'm more than happy to be quite specific. We have an audit area that does something like 28,000 cases a year—
Mr O'Halloran, from the ATO, went on to state:
So we have ramped up the amount of what we term 'ATO initiated' cases. Certainly, from three years ago, in 2016-17, when the audit work raised—and I may need to pause to give you the breakdown—something like $481 million in assessments, in the last two years we've raised assessments for over $800 million in both years.
This is a poorly conceived bill. It is the product of a government that is soft on wage theft. The evidence to this committee was that the bill was unlikely to achieve even its modest aims, at the cost of rewarding and incentivising poor behaviour from employers.
Labor Senators recommend that the bill not be passed.
Senator Alex GallacherSenator Jenny McAllister
Deputy ChairSenator for NSW