Retirement planning: Clients shouldn't lose out during time out

Part-time, contract and self-employed workers could be missing out on retirement security. A growing proportion of the Australian workforce is now working part-time or on a casual or contract basis, with the number of permanent, full-time employees on the decline.

For many, working fewer hours offers real benefits when it comes to meeting lifestyle and family goals, while for others working fewer hours is not a choice but a situation imposed on them by the current economic climate.

Whatever the reason for the change in working patterns, there is concern about these workers’ ability to achieve the retirement funding levels of their full-time, permanently-employed peers.

In many cases, they may not only be working fewer hours, with a commensurate drop in employer superannuation contributions, but they may also fall outside the conventional realm of compulsory superannuation guarantee (SG) contributions.

This means it’s essentially up to them to know the rules so they can make contributions on their own behalf and be sure to take advantage of various government concessions available. No-one else will be doing it for them so they really need to be proactive to avoid missing out.

It’s no secret that hard economic times have led employers to ask employees to reduce hours rather than cut positions. And where positions have been cut, it is not unusual for a person to take on contract work. Throw this in with the increased number of casual workers in the workforce and you have a situation where a significant proportion of Australian workers could be missing out.

Who is an employer?

The SG legislation states the definition of ‘employer’ is its ordinary meaning. An employer is a person who employs another person under an employment contract (either oral or written) on a full-time, part-time or casual basis. Characteristics of an employer are:

• control over employees;
• responsibility for the payment of salary/wages; and
• power to dismiss or hire employees.

Who is an employee?

Employers are required to make SG contributions on behalf of all employees, except those who are specifically exempt. The ordinary meaning of ‘employee’ is used, but it is extended to include certain circumstances. The following groups of people are considered employees for SG purposes:

• a person who works under a contract that is wholly or principally for their labour;
• members of a board of directors;
• a person who is entitled to payment for the performance of duties as a member of the executive body of a body corporate;
• members of Commonwealth Parliament, state parliament and legislative assemblies;
• artists, musicians, sportspersons and so on; and
• a person who is paid to perform, present or undertake a similar activity involving the exercise of intellectual, artistic, musical, physical or other personal skills.

Who misses out?

So who misses out on receiving SG?

• sole traders;
• partners in a partnership;
• employees paid less than $450 in a calendar month;
• employees aged 70 or over;
• employees under 18 years of age and working less than 30 hours a week;
• people employed for domestic/private work for 30 hours a week or less; and
• employees temporarily working overseas and covered by a bilateral superannuation agreement.

Self-employed persons who operate under a sole trader structure, along with those who are in partnership, have no superannuation guarantee responsibility and are provided with incentives from the Government to encourage them to contribute towards their superannuation.

Workers under 18

The interaction of the $450 per month and part-time employees less than 18 years of age exemptions is covered in Superannuation Guarantee Ruling 2003/5. In summary, SG is not payable where an employee under 18 years of age works for less than 30 hours a week, even if they earn more than $450 per month.

However if the same employee works for 30 hours or more in one week, SG will be payable on the ordinary time earnings paid in respect of that week, provided the salary and wages paid over the calendar month exceeds $450.

What if employee circumstances change?

An employee’s circumstances may change during the financial year. For example, the employee turns 70, which means SG payments are no longer required, or the person turns 18, which means the employer may now be liable to pay SG. If there is a change in an employee’s circumstances during a contribution period, the notional earnings base for the relevant period is reduced to reflect the exempt salary or wages. This means the employer is only liable to pay SG before or after the change in circumstances, not for when the employee was an ‘exempt employee’.

What about SG for contractors?

A common misconception is that SG is not payable on behalf of an individual contractor who invoices for their services using an Australian Business Number (ABN). This is not necessarily correct.

Where a contract is wholly or principally for the provision of an individual’s labour (Superannuation Guarantee Administration Act 1992 s 12(3)), an employer/employee relationship is deemed to exist and SG is generally payable by the entity(s) that engage(s) the individual contractor.

In general terms, a contract is considered to be wholly or principally for labour if the individual is paid wholly or principally for his or her own personal labour and skills, which include physical labour, mental and artistic effort. The person must perform the contract work personally and be paid for their hours worked rather than paid to achieve an end result.

On the other hand, it is unlikely that an employer/employee relationship will exist if the contract is with someone other than the person who will actually be providing the labour (eg, a corporate entity), or allows the individual to sub-contract to a third party.

Further, it is important to recognise that if SG is payable for a contractor, this will make them an employee for SG purposes.

As such, any remuneration received under this contract will be classified as employment income, potentially inhibiting the contractor’s ability to satisfy the less than 10 per cent rule in order to make personal tax-deductible contributions into super. In this situation, there is no reason why they could not enter into a salary-sacrifice arrangement, which is likely to produce a similar result.

What options are there to keep retirement plans on track?

Tax-deductible contributions

Individuals who meet certain conditions may claim a full tax deduction for personal superannuation contributions. Typically they are:

• self-employed persons;
• employees who satisfy the 10 per cent rule; and
• persons receiving pension and/or investment income only.

To be eligible to claim a tax deduction, the member needs to satisfy the following:

• the contribution is made on or before 28 days of the month following the month in which the person turns 75; and
• maximum earnings as an employee (10 per cent rule) if, in the year in which the contribution is made, the person is an employee (for SG purposes), the sum of assessable income (grossed up by reportable employer superannuation contributions) and reportable fringe benefits from that employment is less than 10 per cent of total:
• assessable income (grossed up by reportable employer superannuation contributions); and
• reportable fringe benefits.

If the person is under age 18 (at the end of the year), they must have derived income from carrying on a business or from being an employee.

The person must give a written notice of their intention to claim a tax deduction to the trustee of the fund (by the date their tax return is lodged or the end of the next financial year, whichever is earlier) and the trustee must have given an acknowledgement of receipt of notice.

Other contribution options

For stay-at-home mums and dads, part-time workers, seasonal workers and others with broken work patterns during a financial year, options include:

• taking advantage of the co-contribution rules by contributing up to $1,000 and receiving dollar-for-dollar contribution from government (subject to applicable limits);
• claiming any relevant spouse contribution offset for contributions made on their behalf by their working spouse; and
• contribution splitting with their working spouse, who can split 85 per cent of their employer or salary sacrifice contributions with them.

What do you need to take into consideration?

Salary sacrifice superannuation contributions

Salary sacrifice contributions can be used to help maximise superannuation benefits, especially for persons who have experienced breaks in their work pattern and who want to catch up on lost superannuation.

However, it is important to remember that superannuation contributions made under a salary sacrifice arrangement are employer contributions. This means salary sacrifice contributions can be used to meet the employer’s SG obligation.

SG is based on salary actually paid for a quarter after salary sacrifice. If a client is salary sacrificing, this should be taken into consideration when negotiating the person’s package.

Example

David earns $70,000 per annum and also salary sacrifices $10,000 to superannuation (ie, total package of $80,000). His employer’s SG obligation for the 2009/10 year is $6,300 ($70,000 x 9 per cent) as salary sacrifice to superannuation is not included in the employee’s earnings base.

As the salary sacrifice of $10,000 is treated as an employer contribution, it can count towards the employer’s obligation. In this case the employer has met his SG obligation by the salary sacrifice arrangement.

Contribution limits

With all the contribution options currently available to workers and non-workers, you need to consider the contribution limits that apply. There are two sets of contribution limits that apply:

1. non-concessional contribution cap; and

2. concessional contribution cap.

Non-concessional contribution cap

This cap is currently $150,000 per annum with a ‘bring forward’ provision of $450,000 for persons aged less than 65. Non-concessional contributions that count towards the cap include all personal contributions for which no tax deduction has been claimed.

Concessional contribution cap