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

ANDERSON, Prof. Helen, Private capacity

[15:09]

CHAIR: I now welcome Professor Helen Anderson of Melbourne Law School. 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 we will open it up for questions.

Prof. Anderson : Thank you for allowing me to come to speak to you today. I am appearing on my own behalf, not on behalf of the university representing my research. I will keep this very short.

I am a corporate law/insolvency law specialist, rather than labour or taxation law. I am very happy to answer questions relating to ASIC or to corporate law and insolvency, of course. I have just completed, or led a team that has completed, a report about recommendations to deal with phoenix activity. I have brought a copy with me in case you were interested and wanted to take it away to read it. I would be very happy to answer questions another time about that report.

CHAIR: Okay, thank you very much. I will start by talking about circumstances of businesses in their normal operations as opposed to insolvency-type situations. You said that it is difficult for employees to monitor unpaid super. Are the current efforts around super stream and single-touch payroll enough?

Prof. Anderson : I do not believe so. As I have heard from others and as I have read the submissions, I believe that single-touch payroll, where it is simply reporting, undermines the director penalty notice regime. It puts the onus back on the ATO to send out the DPN and that can immediately be defeated by promptly placing the company into liquidation. So, even if it is under 20 employees, if everyone reports but does not pay at the same time then the onus is 100 per cent back on the ATO to send out perhaps hundreds of thousands of DPNs for noncompliance. So, single-touch payroll, like the others have mentioned, I think can be absolutely revolutionary—particularly in the phoenix context; it takes away a lot of the incentive to phoenix if you are not going to profit by it. But I do believe that it has to be payment as well as reporting.

CHAIR: And in respect of pay slips: do you think they should report actual superannuation contributions made, and not just liabilities incurred?

Prof. Anderson : I am no expert on pay slip reporting, I am afraid.

CHAIR: Okay. And what about the concept of more frequent SG payments. Do you have a view about that?

Prof. Anderson : Yes. I would also agree that if single-touch payroll were implemented, then the payment should be fortnightly along with the wages, or whatever the period is.

CHAIR: The payroll cycle. Is the ATO doing enough with its information to identify areas where underpayment of super might be occurring?

Prof. Anderson : It does not appear to be. I believe that they are well intentioned, but they have structural issues with their collection. You have not asked me yet, but in case you do, I personally believe that something like the Fair Work Ombudsman is better placed to detect a lot of this behaviour because the Fair Work Ombudsman has an inspectorate that often goes out into high-risk workplaces. The ATO relies heavily on employee complaints. Certainly, anecdotally, you hear a great deal about a complaint disappearing into the ATO and no-one hearing about it.

So I believe that the Fair Work Ombudsman, which at the moment is absolutely going gangbusters about noncompliance for wages, would be well positioned at the very least to detect a lot of these nonpayments. At the moment I feel like the Fair Work Ombudsman does not want to trample on the turf of the ATO and perhaps confuse the issue, even though, obviously, they do have some genuine jurisdiction already. But I think that an enhanced role for the Fair Work Ombudsman would be very useful.

CHAIR: And what about other groups, such as unions or the funds themselves? Should they be given standing to act on behalf of members?

Prof. Anderson : Yes, absolutely. Already under the Fair Work Act unions can bring actions for wages on behalf of employees. The Fair Work Ombudsman sees unions as an ally. I do not see why that same approach could not be taken in relation to the ATO and union complaints. Certainly, in our research we have heard from unions that they are very disappointed that the ATO will not speak to them about complaints. Privacy, I feel, can be a bit overstated in these sorts of areas.

But, in terms of the super funds, as we heard before, I actually spoke to Cbus some years ago about these issues. They do try to chase up an individual person and are told, 'They've changed funds,' or, 'They've left and gone to Australian Super, because you lot were no good,' and that sort of thing. So they are in an incredibly difficult position, and obviously the Heydon royal commission exposed Cbus speaking to unions. So I feel that we are paying undue deference to the issues of privacy and doing employees a disservice. I think they would rather that things were not quite so private but that their super was better protected.

CHAIR: I think you may have just answered the question I am about to ask, but what do you think outweighs the emphasis on privacy? What is the greater public interest?

Prof. Anderson : Absolutely the notion of ensuring that superannuation is paid, particularly for vulnerable people, who perhaps are not aware of what they are entitled to, like migrant workers and people from non-English speaking backgrounds. I feel that we cannot really expect employees to be entirely policing things themselves. I believe they have to be protected, and it is our obligation to design a system that will do that.

CHAIR: In terms of these other third parties getting involved on behalf of employees, what do you think needs to change to allow that to occur? Or is that outside of your—

Prof. Anderson : I am not sure what legislative changes would be required, but it has reminded me of one thing. It is interesting that in the third party reports to the ATO there is a huge amount from the Fair Work Ombudsman and nothing from ASIC. At the end of every insolvency, the external administrator sends a report about a given company to ASIC estimating how much was not paid in wages and super and all sorts of bits of information. ASIC does not appear to pass any of that on to the ATO, and I find that quite startling. There are roughly 8,000 liquidations per year, and that information they have gathered could be passed on. That may be a structural issue within the ASIC Act, perhaps. There are privacy concerns there about disclosing that information, because it does not lead to a specific prosecution, perhaps. But it seems to me that is a valuable amount of information that ASIC gathers as part of its own operations, that could be useful here.

CHAIR: On what basis have you formed the conclusion that ASIC is not passing that information on to the ATO?

Prof. Anderson : The statistics in one of the submissions—perhaps it was the ATO's submission—had a little table of third-party referrals. It had 3,000-odd referrals, and it had around 2,500 from the Fair Work Ombudsman, and other categories. You will be able to find it I am sure. But given that roughly 40 per cent of insolvencies involve unpaid superannuation and there are 8,000 liquidations per year, you would expect thousands, potentially, to come from ASIC to the ATO.

CHAIR: I want to come back to the issue of SuperStream and Single Touch Payroll. Do you think that they impose a disproportionate regulatory burden on businesses?

Prof. Anderson : No, absolutely not. As others have mentioned, it is not as though paperwork is as hard as it used to be. I believe that, with some training, people will get into the habit of doing it. I am a great believer in not just decrying every new law as a bit of red tape to be avoided. I believe that a fair marketplace where everyone pays what they are meant to pay is ultimately good for business. I believe in business regulation that gets rid of cheats and others who do not comply with their obligations. I think that, on the whole, businesses accept a bit of red tape if it means they are not competing with people who are able to rort the system.

CHAIR: When we come to situations of insolvency, do you think the director penalty notice regime is working as intended? And if not, what needs to happen?

Prof. Anderson : It is very difficult, because the DPN system is virtually draconian in the sense that the company does not pay, but the director has to pay. That on its own is the basic idea. As you know, there is a huge carve out for external administration, so in the event that the director gets the notice, he or she has 21 days to quickly whip it into liquidation.

So my feeling is that anyone determined not to pay super perhaps reports what is owing, waits to get the DPN, quickly liquidates the company, starts up a new one—which is absolutely permissible at the moment—and just continues again and starts accruing a new range of debts. So, no, I do not think the DPN system works, but the question of how you would fix it is very difficult. In our phoenix report, our lateral solution is not to try to worry about fixing things, like the DPN—on the contrary. We are talking about the front end and making it difficult to register a new company. ASIC needs to be far more proactive in not allowing people to register the 15th successor company. Information flows are vital backwards and forwards between the ATO and ASIC. We want a director identity number to ensure that people are not establishing companies under false identities or misspellings of their own name and things like that. We believe that if you put in some disrupting mechanisms at the beginning, you may not have so much of an enforcement problem at the end.

CHAIR: Do you have any comments about ASIC's performance in this area in respect of insolvency and phoenixing?

Prof. Anderson : With respect to superannuation in particular, no. I do believe that ASIC could do a lot more on enforcement in relation to phoenix activity, but I do think that ASIC need to be properly funded and instructed that this is a priority. At the moment I believe that, on the contrary, they get the sense that market regulation is far more important and that it is a problem for insolvency practitioners to root out the wrongdoers and that if those wrongdoers are not being brought to account by liquidators then it is the liquidators' problem. I definitely believe that a lot of work needs to be done for ASIC to improve their enforcement in relation to phoenix activity.

CHAIR: What recommendations do you have about regulation and the penalties for directors who engage in illegal phoenixing activity?

Prof. Anderson : Our report has made the point that the civil penalties are still very modest. They are still at their 1993 level. We think that those should be increased. But one of our major recommendations in the enforcement area is that we need a tweak of the Corporations Act to allow the liquidator or ASIC to bring an action to recoup from the newly created company the value of assets transferred across or any benefit that they have received. Once again, we believe that phoenix exists because it is easy, it is cheap, it is invisible and it is incredibly profitable. So you just have to target those things and you will significantly take away the incentive towards phoenix activity. If you could recover from the new company, which is obviously a separate legal entity, the value of what they have received from the old company that would perhaps disrupt and make phoenix just not worth the while.

CHAIR: Do you have a view as to whether the fair entitlements guarantee should be extended to superannuation?

Prof. Anderson : In an ideal world, definitely it would. The point I made in my submission was actually me having a free go about suggesting that employees of abandoned companies at least qualify for FEG, whether that includes superannuation or not. To me, they are an absolutely forgotten population of perhaps 40,000 companies worth of employees as opposed to the 8,000 companies that are in liquidation.

In terms of super within FEG, I completely understand that the government have a finite amount of money here. But the thing to remember is that money put into superannuation now is money presumably not paid out in pension later. So it is not as though it is a question of do they pay it or not; it is when they pay it. Mind you—and I am no expert on superannuation itself—I suppose the advantage of simply paying a pension is that you can dribble it out in fortnightly payments rather than allowing someone to have a super fund that they can grab and spend on a holiday and then go on the pension. So I can understand why there is an argument that super not go into FEG and that those people are simply forced onto the pension.

CHAIR: Going back to your comments about abandoned companies: do you have any data on the number of companies that have outstanding unpaid superannuation?

Prof. Anderson : No, and that is exactly the problem. Because ASIC simply deregister companies after 18 months where the directors have failed to pay their annual fees and respond to forms, they are simply wiped off the face of the earth. No-one looks at them. ASIC do, as of 2012, have the power to place an abandoned company into liquidation, and it has done so—I looked it up—84 times as of July last year. There are, potentially, 150,000 of those over that period of time. They have done it 84 times and recovered $4.4 million in super, so that is an average of five employees for those companies, I worked out. That would, I imagine, be at the top end of what is lost, because ASIC is not going to bother unless it is worth their while; it has to be a decent amount of money. At the same time, it indicates that you cannot assume abandoned companies have no employees losing anything, but how much they are losing is anyone's guess.

Senator HUME: You have been very thorough, thank you very much, Professor. I wanted to ask you a little bit more about a paragraph that was in your submission. It said:

There should be better avenues for information sharing between unions, superannuation funds and relevant regulators. ‘Privacy’ is a shield behind which wrongdoers act with impunity.

I suppose my concern is more about the privacy of the superannuants themselves and at what point you draw a line. If I am an employee of a textile manufacturer and I have a small amount of money in a retail super fund and a small amount of money in an industry superannuation fund, and I am not a union member, to what extent do you think information should be shared, or should I be comfortable with information being shared—whether it is my personal information, my employer's information, or whether it is with regulators? I am not entirely sure I have a good sense of where you think the lines of privacy stop and start.

Prof. Anderson : I suppose I am thinking: what is the harm of the information being out there? If you are not a union member, potentially what you are concerned about would be the union saying, We'll go in to bat for you if you join the union,' so there might be some pressure there. But if you are voluntarily a member of a union, I cannot see that there should be any issue about the union saying: 'We believe you're not getting your super. Tell us what's going on. We're going to the ATO.' Because then the ATO would contact ASIC and say: 'We've heard about an employer where we believe there's unpaid super. Do you know anything? Who are the directors? Do these people have track records?' ASIC might tell the ATO, 'Yes, they're a bunch of shysters that have already done this four times,' and then the ATO knows to bring in the big guns and to act quickly. They could also involve the Fair Work Ombudsman—the more the merrier.

I suppose what I feel is that so many people believe that the government knows—they all have computers and they all talk to each other. It is an AUSTRAC idea—the banks and ATO talk to each other and everything is out there. The opposite seems to be the case in the insolvency area. It is almost like each regulator is so afraid of being accused of improperly sharing information that it is to the massive detriment of these people out there. What would be the harm, in the example you gave, of the union knowing about it? Well, if they are going to put pressure on the employee to join, I get that, but if they were already a union member and they have money all over the place, I cannot see the harm.

Senator HUME: What about if I am a member of a retail superannuation fund only and potentially a member of the union? Do you think the union would go in to bat for me if I was not a member of an industry superannuation fund?

Prof. Anderson : I have no idea, but if that is a risk then that is, perhaps, where penalties should be put in place against unions who coerce people to change funds. I do not know whether that exists at the moment, to be honest. But I think that privacy as an excuse for no-one telling anyone anything is just detrimental overall.

Senator HUME: I have no more questions. Thank you, Chair.

CHAIR: I have one further question. Back onto the Fair Entitlements Guarantee, what do you say about a threshold or trigger for the employee to take the employer to the tribunal to recover debt from the assets? Do you think there should be a threshold there?

Prof. Anderson : Sorry, I do not quite know what we are talking about.

CHAIR: If we agree with the idea that super should come within the Fair Entitlements Guarantee, should there be some limitation on that? Should there be some thresholds?

Prof. Anderson : Superannuation is one of the entitlements to which employees have priority under the Corporations Act. I imagine that in the event that there is an insolvency, and the liquidator is already reporting to FEG about here are the various things—wages and redundancy et cetera—that are owed, if super was included in that then that money could go to the liquidator, who could then disperse it to the employees appropriately and remit the money to the fund. So I do not think there is any sort of structural problem there about the liquidator recovering it. It is a priority payment within a liquidation, and the liquidator, who is already gathering in corporate assets, gathering in FEG money could distribute it via that mechanism, paying off unsecured creditors if there is any spare money. I do not think that there should be any impediment if superannuation were included in FEG.

I do think the key point about super in FEG is it is a matter of what the government can afford. I completely understand, therefore, the position of the submission of the Department of Employment on that. I do not think it adds to the moral hazard; I think the hazard is already out there. I think there are too many other lovely goodies from liquidating that adding super is going to make one jot of difference.

CHAIR: Thank you very much for appearing before us today. That concludes today's hearing. I thank all witnesses who have appeared.

Committee adjourned at 15:32