Modern awards and superannuation - a guide to the new regime

The introduction of modern awards at the beginning of this year means that employers must offer employees choice when it comes to superannuation funds. Mark Gleeson explains what financial planners need to know.

Since the beginning of 2010, employers have been required to meet their obligations under the modern awards legislation — or suffer the consequences.

It is in the interest of financial planners to make their employer clients aware of these new requirements.

The requirement to offer employees a choice of superannuation funds is linked to the modern awards legislation, but it has been in existence for some years.

Financial planners should ensure that breaches are kept to a minimum so that clients can operate their businesses without unnecessary interruptions.

Modern awards

Modern awards started from 1 January 2010 and are part of the Federal Government’s rationalisation of the industrial relations system.

Modern awards, along with the National Employment Standards (NES, which also commence from 1 January, 2010) and the national minimum wage orders made by Fair Work Australia, create a minimum safety net for wages as well as terms and conditions of employment for employees covered by the national workplace relations system.

Default fund

Modern awards include a list of funds that can be used as the default fund of the employer.

From January 1, 2010, an employer must contribute super guarantee (SG) contributions and employers must remit post-tax contributions (non-concessional contributions) into a super fund listed within modern awards, unless:

• the employee is not covered by a modern award;
• the employee is eligible for choice and has chosen their own fund; or
• the employer continues to contribute to the default fund (or its successor fund) they were using prior to 12 September, 2008. This fund can also be used for new employees from 12 September, 2008.

If an employer is required to change their default fund, they must provide a standard choice form (to employees who have choice) within 28 days of changing the default fund.

Employers should seek legal advice or contact an industrial relations specialist for more information about whether employees are covered by a modern award.

Modern awards penalties

Penalties apply if an employer fails to meet their modern awards obligations. The maximum penalty for each breach of a modern award is $6,600 for individuals and $33,000 for companies.

For example, if a company has 10 employees and all contributions are made into the wrong default fund, a $330,000 penalty could apply. Remedies may also be sought by employees, unions or workplace inspectors.

Transitional termination payments

Any employment termination payment entitlement that is determined by a modern award (which works with the NES) cannot qualify as a transitional termination payment.

Transitional arrangements apply where an employment termination payment is specified in an existing employment contract (or Australian workplace agreement, or under Australian law or foreign law) as of 9 May, 2006, provided that the payment is made by 30 June, 2012.

Entitlements determined under a modern award cannot satisfy this requirement.

Transitional termination payments may receive greater tax concessions and can be directed into a super fund, generally without counting towards the contribution caps.

Choice of fund

Choice of fund requires employers to direct SG contributions for eligible employees to the employee’s chosen fund. Modern awards do not affect who is eligible for choice. Generally, the employer must provide choice unless the employee is covered by:

• state industrial award or preserved state agreement;
• Federal industrial agreement such as an Australian workplace agreement (AWA);
• pre-reform AWA, pre-reform certified agreement, collective agreement;
• old industrial relations agreement;
• workplace determination or enterpise agreement; and
• certain defined benefit fund members.

Choice requirements

Employers are required to provide eligible new employees with a standard choice form within 28 days of starting work. The employer must then act on an employee’s choice within two months.

If no choice is made, SG contributions must be paid into an eligible default fund.

When the default fund changes, for example, as part of a modern award, the employer must provide a standard choice form within 28 days of the change.

An employer can refuse an employee’s choice if the requested fund requires the employer to become a ‘participating employer’. This may place additional requirements on the employer (eg, to pay SG monthly instead of quarterly).

Employers must keep records for five years detailing how they have satisfied the choice rules.

Default fund

The default fund must offer a minimum level of life insurance, with some exceptions.

The required cover is generally based on age or the amount of cover that can be purchased with a premium of at least 50c per week. No cover is required for members from age 56.

Employers should check with their super provider to confirm if their default fund satisfies the law.

Choice penalties

If the employer does not offer choice of fund (by failing to provide a standard choice form within 28 days) or does not pay SG contributions into the

chosen fund, a penalty applies. The penalty is 25 per cent of the amount not paid into the chosen fund, capped at $500 per employee per quarter. The choice penalties apply in addition to any super guarantee charges and are not tax deductible.

Case study

ABC Pty Ltd employs 10 staff whose ordinary time earnings are $12,000 each per quarter.

The employer has timely processes for payments of SG but is unaware that the employees are eligible for choice of fund and has not provided the standard choice form.

The required SG of $1,080 ($12,000 x 9 per cent) for each employee is paid but does not comply with choice.

The penalty is $270 ($1,080 x 25 per cent per employee and creates a total non-deductible expense of $2,700.

Conclusion

Employers affected by the modern awards changes should act urgently and review their default superannuation fund requirements now.

A modern award may require the employer to change the default fund and provide a new standard choice form.

Employers who are unaware of the changes may currently be contributing to the wrong fund. It is vital for employers affected by choice of fund rules to make sufficient SG contributions to the correct fund by the quarterly cut-off dates.

Ignoring the modern awards and choice of fund rules may result in significant penalties being charged.

Prudent planning can ensure your employer clients meet legislative obligations, avoid penalties and grow their business without interference.

Mark Gleeson is technical services manager at ING Australia.