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Economics References Committee
14/03/2017
Superannuation guarantee non-payment

STRACHAN, Mr James, Director, Advocacy, Australian Small Business and Family Enterprise Ombudsman

Evidence was taken via teleconference

CHAIR: I welcome via teleconference Mr Strachan from the Office of the Australian Small Business and Family Enterprise Ombudsman. I remind senators that the Senate has resolved that an officer of a department of the Commonwealth or of a state shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. Officers of the department are also reminded that any claim that it would be contrary to the public interest to answer a question must be made by a minister and should be accompanied by a statement setting out the basis for the claim.

Thank you for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so, and then the committee will ask questions.

Mr Strachan : I would like to thank you very much for having the Office of the Australian Small Business and Family Enterprise Ombudsman at the hearing. There are three issues that the office sees regarding the non-payment of the superannuation guarantee that reflect the nature of small business concerns. These include: the administrative burden for small businesses in trying to fulfil their obligations under the superannuation guarantee; the complexity of existing legislation as small businesses try to navigate and understand their exact requirements; and then putting in context the issue of non-compliance and consideration of why a small business may not be non-compliant. There are a number of reasons that consideration should be given in the overall context of why businesses, particularly small businesses, may fail to comply fully with their obligations.

CHAIR: Mr Strachan, you have just reiterated the point that, in your view, the superannuation system can be complex. I take it, therefore, you are supportive of the recent moves to simplify the payment and reporting processes like SuperStream and Single Touch Payroll.

Mr Strachan : I think SuperStream in particular and things like the Small Business Superannuation Clearing House are good steps in the right direction, and they both reduce the admin. burden on small business. With those aspects we feel that more can be done to remove the burden from small business. How these systems like Single Touch Payroll are implemented on small business is a consideration that we are keen to make sure is taken into account, because they introduce a requirement for transition and because not all businesses have the same level of digital literacy or the necessary skills to do these things solely by themselves.

CHAIR: Would you agree that the Small Business Superannuation Clearing House assists to reduce complexity?

Mr Strachan : That is something that we agree with. We think the Small Business Superannuation Clearing House is a good first step and does simplify things for small business. We see that more could be done in simplifying it for small business so that the interaction between small business and their superannuation obligations for their employees is conducted in a more efficient manner, and our recommendation in our paper was to look at—

CHAIR: Sorry to interrupt, Mr Strachan, I am being asked by the recording staff here to ask you to pick up the handset. We are having difficulties with the quality of the sound coming through.

Mr Strachan : I am sorry. I am in the hearing room so it is an inbuilt room microphone.

CHAIR: Whatever you have just done seems to have improved things a bit.

Mr Strachan : To continue my point, we believe that the way forward would be to look at using the pay-as-you-go system so that small businesses can use a one-off approach to fulfil their obligations.

CHAIR: I am interested in your view as to how you see superannuation. Do you see it as other witnesses have suggested, as something in the category of deferred wages?

Mr Strachan : I realise that there is a difference of opinion here between superannuation being a benefit or superannuation being just wages. I am unable to speak to the ombudsman on that topic. But in the notion of our proposed way forward, if we were looking at pay-as-you-go remittances, we would be looking more along the lines of it being considered as part of an employee's wages and salary.

CHAIR: I am not sure I quite heard exactly what you said but this concept of deferred wages—

Mr Strachan : Deferred wages would be more along the lines of what we would see superannuation as.

CHAIR: Have you lifted the handset, Mr Strachan?

Mr Strachan : I am speaking towards the microphone if that is helpful.

CHAIR: It is still causing a bit of an issue. Is there no way that you can pick up a handset there at all?

Mr Strachan : The microphone is built into the structure of the room.

CHAIR: We had previous witnesses talk to us about wage fraud cases. I am interested in small businesses and the concerns they have expressed to you or that you might come become aware of. Do you agree that perhaps there is not necessarily a level playing field out there? There are some businesses complying with the law and others not?

Mr Strachan : I would reflect that the superannuation system more broadly works and that almost all small businesses would be seeking to comply with their obligations. I will acknowledge that there a very small minority of small businesses that may never seek to comply with their superannuation guarantee obligations but I would probably point out that that sort of small-business owner is probably not looking to comply with other legislative requirements and that there will always be that type of business owner out there. The idea is, not just with superannuation, to be able to identify and make those companies meet their obligations as quickly as possible.

CHAIR: I suppose I am also talking about here the temptation to use superannuation as a cash flow tool. Would you say that those small employers that do that have a bit of an advantage over those that pay superannuation on a more regular basis?

Mr Strachan : I would say that if they are looking at any sort of mechanism to gain an advantage in the marketplace, businesses would seek to exploit that. But I would also state that the majority of small-business owners are trying to do the right thing. They know they have an obligation in relation to their employees and the question then comes down to how do they meet that obligation because they are trying to do right the right thing. They may just be befuddled with the complexity, the range of options and the things they have to accommodate in terms of employee choice and the requirements that the existing legislative framework provides. You mentioned the question there of cashflow. The key concern that all small businesses have is their cashflow. We are currently doing a payments inquiry to look at the issue of late payments and the effect that has on small business cashflow.

If I can, I will share with the committee some of the findings of our survey that we did that looked at late payments. As we know, cashflow is king to any business. Having the ability to pay your debts as and when they fall due is the key requirement to making sure that you remain solvent. What we have found is that late payments is a problem that is affecting not just small business, or small businesses in particular, but many businesses in Australia. For example, our survey which was taken by over 2,700 small business respondents across Australia found that in the last financial year 66 per cent of respondents indicated that the trend in late payments had increased for them, either slightly or significantly. That is two out of three businesses that late payments were increasing. When payments increased it obviously affected their ability to pay their cashflow and their working capital management. This flows on through their businesses. One in two suppliers say that late payments to them would cause them to pay a supplier late. Furthermore, around two in five respondents said that late payments would make them delay payments to a government entity, a state revenue office, a tax office or a local council. Interestingly enough, one in five respondents, or around 20 per cent, said that late payments would cause them to delay or put off paying their staff salaries, benefits or superannuation entitlements. So that information suggests to us that the problem where it originates in late payments and the effect of cashflow trickles through the supply chain and through the economy. It is one of the key factors that small businesses have to consider when they are looking to pay all their obligations—not to provide it as an excuse for why they would not but to provide as an explanation of the things that their small business are grappling with.

CHAIR: Just that last point: if I understood you correctly, you are saying one in five of the respondents said that late payments to them from their customers had caused delay to paying staff salaries.

Mr Strachan : That is correct.

CHAIR: That is a fairly extraordinary—do you have any further breakdown as to what sort of delays are occurring there with the payment of staff salaries?

Mr Strachan : No, I do not. It is not just the salaries. The question was framed in terms of salary benefits and entitlements. So it could be one or more of those sorts of things. I suppose this leads into the question of context of non-payment and cashflow. For example, obviously, particularly for small businesses any disruption to cashflow then upsets their business operations and planning. This could be as simple as the car park or road in front of your business being dug up by the local council which reduces foot traffic. That then feeds into how much cash you have at the end of the month. In those circumstances, obviously small businesses are trying to do the right thing and would seek to pay their staff salaries first, but then would be looking to manage their expenditure based on when their other obligations fall due. To give some context around the fact that that could affect a small business not paying their superannuation exactly on the month but then waiting towards the quarter that they are obliged to pay it.

CHAIR: The other tool, I suppose, that is available to small businesses that have a problem with cashflow is, rather than using their employee entitlements as a tool, to go to their financial institution and to seek more flexible terms or better terms from their financial institutions. Is this something that the ombudsman is looking at? Do you have a view about that?

Mr Strachan : I think we also have data from our survey on that. That data is showing us that is one of the things that small businesses do in the first case when they experience late payments. They seek to fill the gap through their own means either by credit card or by going back to their bank and seeking to refinance their existing working capital. What we are finding is that businesses do that as the first port of call, and as businesses get further stressed they look again to plug the gaps wherever they can. The interesting thing on that is that while we are looking here at non-payment of superannuation guarantee for employees, the effects of small businesses looking to plug the gaps means that they often are bearing the stress of these things.

For example, trying to make ends meet we found, from our survey, that around three in five respondents said that when they experience late payments they have a physical manifestation around their health—either they lose appetite or feel generally unwell. Four in five said that they feel some mental stress and anxiety. Seventy-five per cent said that their personal financial security was affected. The more shocking thing was that three in five said that they would delay or avoid personal or family expenditure when their business was struggling with cash flow due to late payment. That is a really telling statistic that is saying that for a lot of these small business owners their business is their life, and when they are stressed, because they are finding difficulty in meeting cash flow, they are often going without the next thing—such as the superannuation guarantee—and putting their employees and their suppliers ahead of their personal expenditure.

CHAIR: I am sympathetic to their plight, but I am also wondering how sympathetic the financial institutions are. When you say that is their first port of call when they are experiencing cash flow issues, how responsive are those financial institutions? It is one thing to say that that is where they go, but are they actually getting any positive assistance from their financial institutions?

Mr Strachan : The ombudsman also conducted an inquiry into small business loans. I would say that the initial anecdotal findings about that are that their financial institutions are accommodating up to a point—they will manage their own risk. Obviously, businesses that are quite stressed do not have many options under those circumstances, particularly if they have experienced extended payments or are struggling financially. As with anything, the information that we have finds that the financial institutions would be accommodating to a point, based on their personal circumstances.

CHAIR: Are you supportive of more frequent payment of superannuation?

Mr Strachan : I think the office is supportive of moving it towards a pay-as-you-go that would be either monthly or quarterly, based on the businesses existing requirements. It would be more along the lines of streamlining it with our other administrative and legal obligations that they are trying to meet.

CHAIR: What about if it were to be paid in conjunction with the payroll cycle?

Mr Strachan : I will take that question on notice. Again, as stated, if it were with the pay-as-you-go cycle some businesses of that meet the requirements to pay monthly and would pay that monthly. Others would pay it on a quarterly basis.

CHAIR: You are supportive of the COSBOA approach?

Mr Strachan : We are supportive of the COSBOA approach. I think the approach was also mentioned by the institute of Chartered Accountants Australia and New Zealand.

CHAIR: Given that you have previously mentioned, and I think you have agreed, that superannuation can be classified as 'deferred wages', isn't it a bit confusing to have a system where you have taxes and deferred wages paid to the ATO at the same time?

Mr Strachan : I would say that the nature of the superannuation guarantee is seen as an obligation on any business. Whether or not that is income tax, superannuation or payroll tax, businesses treat that as an obligation they have to pay. Is it confusing? I think, in general, small businesses struggle with understanding some aspects of their tax obligations, but, as long as they recognise that it is something they have to pay, streamlining the processes they have to go through is what we are keen to support. That is why we look to combine it with the pay-as-you-go approach.

CHAIR: So would you be supportive of the extension of single-touch payroll to all businesses?

Mr Strachan : Again, the extension of single-touch payroll to all businesses would have to be looked at in the context of how it would apply. As I mentioned earlier, not all businesses—particularly small businesses—are alike, and there are things such as digital literacy, the cost to the business of extending it and those sorts of things that would have to be considered if pushing it towards all businesses.

Senator KETTER: Given that there would not be any additional administrative burden for those already using electronic payroll systems, that would level the playing field that we talked about earlier.

Mr Strachan : Certainly. The point I am trying to make is that not all businesses have electronic payroll systems, and those factors have to be considered if extending it to all small businesses. That is the key consideration.

CHAIR: Okay. My final question is in relation to the vexed issue of the definition of 'ordinary time earnings'. Do you have a view as to whether that should be simplified to make it easier to comply with?

Mr Strachan : Yes. I think one of the key challenges, particularly between the superannuation guarantee calculation and the difference with the superannuation guarantee charge is the difference between ordinary time earnings. I suppose any harmonisation of that definition would be in the interest of anyone interacting with the superannuation system.

CHAIR: Do you have a view as to whether it should be simplified to the extent that it covers all salary and wages?

Mr Strachan : I think at this stage I will take that question on notice. Sorry.

CHAIR: Okay. Thank you very much. Senator Hume.

Senator HUME: I think that reducing the complexity of both administrative and legislative burden is hugely important in this particular debate. I was pleased to see that the Small Business Ombudsman has a general support for an expansion of the role of the ATO, potentially, in the COSBOA solution. Can you tell me what proportion of small businesses use the clearing house now?

Mr Strachan : I do not have that information. I am sorry.

Senator HUME: Do you have a gut feel for it?

Mr Strachan : No, not off the top of my head. Sorry.

Senator HUME: Okay. I am interested in the issue of the late payments that you mentioned. I can see exactly why there is a problem and understand that, clearly, cash flow management is inexorably intertwined with the viability of small businesses. If a small business does run into cash flow problems, can it notify the ATO or whoever it might be of the potential for problems without being penalised?

Mr Strachan : The answer to that question is, yes, they can. I think the question is probably best directed to the ATO for their processes, but the information we are aware of is that, for example, if a small business is having trouble meetings its tax obligations, they can up to a certain amount go online and work out a payment plan automatically with the ATO. Obviously, if it is outside those conditions, they have to then speak to the ATO in person.

I want to point out at this point that there are issues associated where a business puts its hand up and says it is in difficulty and even goes to the ATO which may be viewed as a risk by a third party—for example, a financial institution that a small business might have a loan with. Entering into a payment plan with the ATO may breach one of the covenants of that loan, which than affects the small business's interest rates and those sorts of things. They may then be seen as in default with that provider. So even being proactive and saying, 'We're in a tricky stage because we're being paid late' or whatever and going to the ATO can lead to further issues with their assisting business. One of the challenges that the ombudsman's office has been raising in our small business loan inquiries is this notion that saying you are in trouble and trying to meet your obligations and work out a payment plan for the ATO can then have further ramifications for your ability to get your business back on track.

Senator HUME: So it is like a red flag you are putting upon yourself. At the moment, is there any way that superannuation guarantee can be paid via a payment plan?

Mr Strachan : I am not aware of that information. Sorry.

Senator HUME: There was a part of your submission that I thought was interesting, but I do not know if I fully understood it. It suggested that under the current system there is no carrot by way of incentive for small business owners to keep track of their obligations to keep track of their obligations. This would complement the stick of the superannuation guarantee.

Mr Strachan : What we are looking at here is the fact, as I think the ATO has pointed out in their submission, there is no obligation under the existing legislation for any business to report on their payments under the superannuation legislation. Similarly, the structure of the penalty and the threat of the superannuation guarantee charge is such that businesses know that, if they do make a mistake, are late or underpay, the superannuation guarantee charge rapidly escalates to be very large penalty. This sort of disincentivises them to raise problems—and there are problems: if the budget details are wrong and the payment gets rejected through the clearing house or through their other means; having to spend hours hunting down the right unique fund identifier; or simply making a simple mistake and not paying with the right amount, whether it be a genuine error or on purpose. There is very little flexibility in terms of putting your hand up and saying, 'I made a mistake, and we've rectified it quickly.' Under current obligations they have to make a statement that they were late paying even by a day and therefore suffer the consequences. That is the context we are looking at in saying that there is no flexibility or carrot for small business owners to come forward and say: 'We're trying to do the best thing. We made a mistake. We fixed it.' They get slapped with penalties under the existing legislation.

Senator HUME: Is that the case even when the clearing house is used? The clearing house does not really have an effect on that?

Mr Strachan : I cannot answer that. I am sorry. I do not know at this stage. I would have to check that for you.

Senator HUME: I wonder whether the COSBOA solution is going to make a difference to that particular issue.

Mr Strachan : Again, it would need further thought about how it would actually work, but it would be providing that information that the small business pays the amount they are obliged to pay, but the details and the information of the choice of funds and how that goes is an interaction left between the individual and the ATO.

Senator HUME: So the COSBOA solution essentially removes any obligation for the employer to have any association with the superannuation fund, and that would remove a lot of the administrative burden that you are alluding to.

Mr Strachan : I would speculate, yes, how it is finally implemented would be a case. But the idea is that you want to foster a closer sense of ownership of individuals, employees, with their superannuation, and placing that in direct positions that they take ownership of it and advise the ATO. It would also allow a better resource entity, such as the ATO, to administer that using the tools, such as SuperStream, far more effectively.

Senator HUME: One of the things that became very clear in your submission was that the vast majority of underpayment of superannuation guarantee is unintentional. Is that correct?

Mr Strachan : We were saying that small-business owners know they have an obligation—almost all of them. I would say only very new people would not know they had to pay it. Our experience is that small-business owners are trying to do the right thing. They are trying to meet their obligations. The majority do. We would also speculate that there are a small portion who would suffer due to the way their business is going and might be seeking to delay their obligations but would not be doing it if they had any choice.

Senator HUME: There does seem to be a lack of transparency and correlation between data from businesses, the ATO and the superannuation funds that makes the data we are basing a lot of the assumptions on quite unreliable. The last witnesses suggested that upping the enforcement powers of superannuation funds or even unions might assist to ensure that employees are paid the superannuation guarantee they are owed. Do you have a response to that?

Mr Strachan : At a general level, we would be looking at what legislation would enable those entities to pursue that. Again, we would probably be in favour of reducing the burden on small businesses, so upping enforcement options I do not think is necessarily the appropriate path, at this stage. The point you made about transparency of information, right now, is more the point to look at here. Without the right information, of knowing exactly what the picture is, a lot of what is being looked at is based on either anecdotal information or information based on older or existing reporting mechanisms.

There are two points: (1) increased transparency of information would be good in the context of it not increasing the burden, particularly on business owners; and (2) the point you made about allowing a third party to start enforcing superannuation guarantee contributions we would probably not be in favour of unless there was a legislative basis enabling both those parties to do so.

CHAIR: In relation to your payment times and practices survey, do you specifically ask questions of the respondents on the responsiveness of their financial institutions in the times they are experiencing difficulties with late payments?

Mr Strachan : Not specifically, no.

CHAIR: Is that something you think would be a worthwhile cause of inquiry for your organisation in the future?

Mr Strachan : That is certainly something we could look into.

CHAIR: I think we are finished. Thank you very much for participating.