What does “Superannuation Guarantee opt-out” mean for SMSF members?

22 Sep 2019

Meg Heffron

Managing Director

Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 was passed by the Senate on Thursday 19 September.

At long last, it allows certain people to opt out of receiving Superannuation Guarantee (SG) contributions from 1 July 2018 (which in practice, now, presumably means 1 July 2019).

The change deals with the current situation where high earners with multiple employers can be forced to exceed their concessional contributions cap because the total of all their compulsory SG contributions takes them over $25,000.

The opt out only applies to those with multiple employers because the existing law does not create this same problem for those with only one employer. In 2019/20, for example, the Superannuation Guarantee rate is 9.5% and employers are legally only required to contribute this amount up to a maximum earnings amount (known as the “maximum contribution base”) of $55,270 per quarter ($221,080 pa). Since 9.5% of $221,080 is less than $25,000 ($21,003), the SG rules themselves do not force anyone to receive more than $25,000 in concessional contributions. Where employers do exceed the limit, it is because they are contributing more than their legal requirements. Even under the old law, individuals and their employers could choose to negotiate that any excess over the legal requirements was paid as salary rather than superannuation.

The situation is different for someone earning (say) $150,000 from two employers. Since both must contribute 9.5% ($14,250 pa), an excess over the $25,000 cap is the inevitable result.

This is what the new law is designed to change.

It does so by introducing the following process:

  1. An individual applies to the ATO for a special certificate known as an “employer shortfall exemption certificate”. If issued, it covers just one employer (although a single application can be used to request certificates for several employers at once) and only covers the specific period identified in the certificate (ie, it does not go on indefinitely but it can be issued to cover multiple quarters in the same financial year).

  2. If issued, the certificate is provided to the relevant employee and their employer. It allows that employer to treat the maximum contribution base as $nil for the individual for any quarter covered by the certificate. This means the employer no longer has any legal requirement to pay any superannuation for the individual for that period.

When deciding whether or not to issue the certificate, the ATO will need to be satisfied that:

  • the person is likely to exceed their concessional contributions cap if the certificate is not issued,
  • there will be at least one employer required to pay SG contributions (ie, not receiving an exemption certificate), and
  • it is appropriate to issue the certificate, taking into account any other factors considered relevant (eg the Commissioner may refuse to issue a certificate if the individual has applied for one for the employer paying the highest salary and their contributions would be reduced by a substantially larger amount than is necessary).

Applications can only be made in relation to employers that the person actually works for at the time of making the application (ie, it cannot be arranged for future employment) and the usual deadline for applications will be 60 days before the quarter starts. (We expect this will be extended for 2019/20.)

Once issued, the certificate cannot be revoked or varied by the Commissioner but:

  • the individual can choose not to ask for one even though they will exceed their cap,
  • the employer can choose to ignore it, and
  • the individual and their employer can make alternative arrangements that still involve making superannuation contributions.

The idea of the certificate is to give employers protection from breaching the SG rules should they rely on this opt out mechanism. It is not designed to prevent them from making contributions should they choose to do so.

Importantly, the certificate process is completely silent on whether the individual and their employer have negotiated some form of alternative compensation for the loss of the superannuation contributions. This is left entirely to the two parties to resolve themselves and may sometimes mean it is better not to use the new rules. 

For example, an individual who is unable to reach an agreement with their employer to provide additional wages in lieu of compulsory contributions may choose not to apply for the notice. Without it, the employer is still legally obliged to provide the normal compulsory contributions. While these will generate an excess, the end result of the refund process is that the individual is generally only marginally worse off than if they had received the contributions as extra salary in any case. The main downside (and the trigger for the opt out rules) is the administrative hassle this involves. They are almost certainly better off than if they had received no compensation at all in return for forgoing superannuation contributions.

The individual might also arrange with the employer that some contributions are made to ensure they still get maximum benefit from their concessional contributions cap. 

For example, consider the situation outlined earlier where there were two employers (A and B), both paying $150,000 pa to the individual. The individual may apply for an employer shortfall exemption certificate, for just Employer B. However, this would leave the individual with only $14,250 in employer contributions (from Employer A). There would be nothing preventing the individual from arranging an additional $10,750 in employer contributions from either of their employers – including Employer B who no longer has any legal obligation to make contributions. These contributions would not be SG contributions. (This can be relevant in certain circumstances – for example, voluntary contributions can be released under the First Home Super Save Scheme while SG contributions cannot.) They might arrange, for example, to have Employer B pay $10,750 in superannuation contributions and $3,500 in additional salary.

Equally the individual could ask Employer B to simply pay the additional $14,250 in salary and ask Employer A to salary sacrifice $10,750 in addition to the usual SG contributions.

Finally, the individual could ask Employer B to pay the $14,250 as additional salary and make a personal contribution of $10,750 for which they claim a tax deduction.

As with any negotiations around salary and superannuation, both parties would need to carefully consider the impact of their chosen arrangement on other benefits that are linked to salary.