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

FAVRE, Ms Isabelle, Senior Director, Australian National Audit Office

MORRIS, Mr Andrew, Executive Director, Australian National Audit Office

CHAIR: Welcome. Thank you for appearing before the committee today and apologies for the fact that we are running a bit late. I invite you to make a brief opening statement, should you wish to do so, and then the committee will ask questions.

Mr Morris : I have a brief statement. The statement and our evidence are based on the findings of the audit conducted by the ANAO in 2015 entitled Promoting compliance with superannuation guarantee obligations. The audit concluded that the ATO's administration of the super guarantee scheme had been generally effective, particularly having regard to the scale of the scheme and the substantial flow of legislative revenue generated. The audit noted that the ATO carries out a wide range of activities to promote compliance and to help employers and employees understand their super guarantee rights and obligations. This is also explained in the ATO's submission to the inquiry. The audit identified scope for the ATO to better target its compliance activities and more effectively promote employer compliance with super guarantee obligations. In particular, the ATO should gain a greater understanding of the level of noncompliance with super guarantee obligations across industry sectors and types of employers.

While the Commissioner of Taxation's annual report in 2013-14 had stated that, overall, employers demonstrated high levels of voluntary compliance, this view did not adequately reflect the level of noncompliance in specific groups of employers in industry sectors. The ATO's own internal risk assessment indicated that as many as 11 to 20 per cent of employers could be non-compliant with their super guarantee obligations and that noncompliance is endemic, especially in small business and industries where a large number of cash transactions and contracting arrangements occur. Importantly, this noncompliance primarily affects lower paid employees and those who are likely to rely on the age pension in their later years.

The ANAO made four recommendations in the audit directed towards the ATO: better analysing noncompliance and further engaging with superannuation stakeholders; emphasising its enforcement role in education material; better coordinating compliance activities within the agency; and evaluating the effectiveness of compliance activities. The ATO agreed with those recommendations.

CHAIR: Thank you very much. I note, Dr Favre and Mr Morris, you were both authors of that 2014 ANAO report. Do you have any general observations on the extent of noncompliance with SG and the ATO's effectiveness in dealing with the issue?

Mr Morris : That is where it was just not clear to us how extensive it was, so again we were noting the ATO's general view that it seemed to be under control, that their risk mitigation sort of dashboards were all green. That is why we put emphasis on that ATO internal risk assessment of 11 to 20 per cent. We did note that that was not really a data-rich assessment. Looking at that document, it could be seen that it noted the fact that the legislative amount of superannuation guarantee was collected by the ATO; that is, the 9½ per cent rate across the economy seemed to be being met and there was a low level of employee notifications. That was the positive part of it.

But that assessment also noted the number of complaints and the findings from the compliance activities. Again, we noted as well that there had been a reasonable number of compliance activities—there were about 500 or 600 from the super guarantee line and about 5,000 from small business—and they had quite high strike rates or high returns from that compliance activity: about 70 per cent from the super guarantee and 80 per cent from the others. We can give credit to the ATO that they were prioritising quite well, but it seemed to be where they looked there was noncompliance. From that, our hypothesis was that perhaps the amount of noncompliance was higher than the ATO were recognising and we were seeing that influencing their prioritisation resourcing decisions. But we do not have a precise number; we cannot come to a precise number on that.

CHAIR: You were able to come up with a range. I am not sure whether you were here this morning, but the working group was not able to provide us with a real sense that they had an understanding of the extent of noncompliance. Given that the ATO indicated in response to your report that they agreed and that they said they were commencing work to measure the SG gap—and just remind me when it was that they responded.

Ms Favre : We tabled the report in June 2015.

CHAIR: They said that they were doing an industry analysis which would aid in providing a more accurate estimation of SG compliance. Are you surprised that we went possibly nearly two years down the track without a more accurate assessment?

Ms Favre : Yes, we have noted in the submission that they have commenced work on estimating the SG gap but that work is not finished and they do not intend to conduct this work at the industry or sector level. We can only note this.

CHAIR: What would have been your expectation of the ATO?

Mr Morris : It is hard to know their precise timing, I must say. We knew there were quite a number of years where they had not been working on the super guarantee gap or any of the tax gaps. They had a concerted effort from about 2015 to do work on a number of gaps, including the superannuation gap. I understand that they have methodological problems with, and including, the non-observed economy and measuring wages. I can understand why the ATO would want to have confidence about those estimates before they are put into the public arena. Having said that, they did make some commitments for super guarantee for the cash economy that they would have the gap estimates available earlier, and that slipped. That is all we can probably say.

CHAIR: We probably could have asked the ATO about this earlier. In response to you, they indicated that, through the tailoring the employer experience for superannuation project commencing on 1 July 2015, 'we will be able to better assess systemic risks with employer noncompliance'. Then, 'also through our relationships with the superannuation industry, we will explore opportunities to pilot some collaborative approaches'. There was some clear indication that work was going to happen. What is the next step from your perspective? Is there any further follow-up from the ANAO?

Mr Morris : We had an audit that came out in February this year that followed up on a number of recommendations from our audits of the ATO. That included two of the recommendations from this audit report, recommendations 1 and 3. We had found that the ATO had implemented those recommendations to the extent that they had taken the administrative steps to progress those issues that we had asked them to take. For instance, they had done more work with their high-risk industry model in their compliance sphere and their employer strategy. I think they had also done work with the tailoring the employer experience with superannuation strategy to better target their employer notification work. They had gone through a series of workshops that they held through their superannuation relationship network. I think there were three meetings in 2015 where they discussed the ATO's compliance activities and how they could better leverage off compliance activities from other agencies, the Fair Work Ombudsman and some of the super funds. They also discussed some issues around debt collection.

So we saw that they had gone through those processes. We had not seen the outcomes of those processes, and whether they had been able to materially improve the situation in terms of identifying noncompliance with super guarantee obligations and collecting debt more quickly. We certainly have not seen that. In terms of recommendation 3, again the ATO had done some work internally to better coordinate the super guarantee line with the taxpayer lodgement line and also the small business line. I saw that in the super guarantee line they were considering the pay-as-you-go tax withholding elements in the super audits, and vice versa for the small business audits. So they were doing work there, but we certainly did not see that they had materially improved from where they were when we had finished that audit in 2015.

Ms Favre : It is interesting to note that, in the audit which was tabled in June 2015, they said they were scheduled to implement the tailoring the employer experience for SG from July 2015, and, in their submission today, they are still in the process of implementing this strategy. It is not clear how this project will help with understanding levels of noncompliance. It certainly aims to target employers better and to have a differentiated approach to compliance with employers. For instance, an employer who was found to have a good history of compliance and was found to be noncompliant would have a light-touch approach, whereas someone with a heavier history of noncompliance would be audited more readily. So that is a good approach, but it is not clear how this will help with assessing the level of noncompliance as such.

CHAIR: Perhaps the simplest way of doing that is looking at the member contribution statement record and matching it with the tax record. In your audit work with the ATO, were you provided with any of that type of analysis—any evidence that the ATO had done work of that nature?

Ms Favre : We spent quite a lot of time trying to understand the approach that the ATO was taking to assess the level of noncompliance. It was quite clear that they were not having an approach at industry level—they were quite clear about this—and that was because the legislation is such that they do not have all the information that would allow them to do so easily and very reliably. It was not within the scope of our audit to try to come to this estimate ourselves; we were not equipped to do that. But we certainly made a recommendation—

CHAIR: You came up with a range, I think.

Ms Favre : This range was from their own internal documents. We did try to look at the methodology, but it was not within the range of our ability to do that confidently.

Mr Morris : Just to clarify, that range was from the ATO's own internal document, so they had their own internal risk assessment. That risk assessment said that it believed that the range was between 11 and 20 per cent.

Ms Favre : But that did not seem to be the range that they were using, or the assessment that they were using, in their publicly available documents.

CHAIR: I am struggling to understand how that type of assessment could be made without at least some engagement with industry at some point. You cannot tell us how they established that range?

Mr Morris : Just looking at the documents, they have matrices and ways to measure against that. They have a range that is five per cent and there is presumably five to 10 and 11 to 20. That ATO risk assessment went through some of the argument. They thought five per cent was too low. While there was a relatively low amount of employee notifications and it seemed like enough super guarantee was being collected, there were quite a number of complaints and quite a number of findings and debts raised from the compliance work. Also, the cash economy was relevant to the super guarantee noncompliance. That was what, more qualitatively than qualitatively, led to that selection of 11 to 20 per cent noncompliance by employers rather than the five per cent likelihood rate.

CHAIR: Given that the ATO said they agreed with your findings and they were going to do some work, would you have expected that they would have come up with a figure? Obviously, subject to caveats on the cash economy, and perhaps caveats around the ordinary time earnings issues and with some parameters there, would it be a reasonable expectation that there would have been some sort of more accurate assessment of the scope of the problem?

Mr Morris : We would certainly hope that that is happening. We would have hoped for it to have happened by now, in line with the scheduling that had been put down by the ATO. Hopefully, some time in the near future, they do come up with an estimate of the superannuation guarantee gap, as much as anything so that it can influence their priorities. Our hypothesis was that, when the problem is bigger than the ATO considered, perhaps they should be providing more resourcing to it and not less. I must say that, looking at the ATO's submission, 2013-14, which was the date that we based a lot of our analysis on, was probably the high point in terms of the amount of resourcing and the number of audits and reviews that were done. Since then there has been a bit a reduction from the ATO. At the same time there has been a reduction overall in ATO resourcing. We do not know what the proportion is overall, but there has been a reduction in the inputs. It seems that they have probably got a little more efficient in that the results in terms at least of the liabilities raised do not seem to have gone down as much as the resourcing and the number of audits have gone down.

CHAIR: Is there evidence that the ATO is not really prioritising this particular issue? Would you say that?

Mr Morris : We are just saying that I think that is what the trend is. If our hypothesis was that perhaps they should prioritise it higher, they certainly have not done that. But it would be predicated on the result of what the superannuation gap was compared to other gaps that the ATO is looking at, so that they can have a consideration, a prioritisation and then, over time, look at how those gaps were going, consider their risk tolerances and see what that means for their resourcing.

CHAIR: Correct me if I am wrong here, but the reason why you made those recommendations was because good policy development requires some understanding of the size of the problem before you devote resources to it. Would that be a fair assessment?

Mr Morris : Yes, that is exactly right. When we are doing our audits, we are trying to say, 'You've done this number of audits; you've got these results; what does that mean from your compliance program and your education program; does that mean it is being pretty much effective, as effective as it could be?' To know that, you really should have some idea about the level of noncompliance to frame that finding or the audit conclusion about the compliance program.

CHAIR: Have you read the Industry Super Australia report estimating noncompliance using the type of data matching I was talking about earlier?

Ms Favre : Yes.

CHAIR: Do you have any comments about the methodology they used?

Ms Favre : I am not an economist, so I will be very careful. It seems to be a very thorough and cautious methodology. The estimates put forward are systematically the most conservative of the different methodologies that they have used. Given that an estimate is just that—an estimate—and it is meant to help direct a complaints strategy for the ATO, for instance, and we know it is an estimate, there is a risk that the estimate is not correct. But it still seemed to be good enough to be used for directing a complaints strategy.

Mr Morris : While we would not comment on the particular methodology, it would complement well the top-down approach. The ATO has the top-down approach for the SG gap and it would also be useful for that more bottom-up approach to be able to identify the number of employees, say, or employers that are not compliant. If it is also able to target some of the industries and sectors—if it goes that far, that would complement the gap analysis.

CHAIR: I have a final question, before I hand over to Senator Hume. I presume that this data matching methodology is not uncommon within the Public Service generally. Are you aware of any reasons why the ATO would not be using that methodology to assess the risk here?

Mr Morris : Not particularly, no. I think it is work that they could consider doing. I do not know particular reasons why they are not.

Senator HUME: Your report was in 2014; is that correct?

Mr Morris : Yes, tabled in—

Senator HUME: You reported in 2014. What was the age of the data that you used?

Mr Morris : A lot of that was for 2013-14. It was tabled in June 2015.

Ms Favre : We looked at 2013-14, which was the latest data that we had, but we went back to 2009-10. We looked at those four years when we could and when it was appropriate.

Senator HUME: The period between 2013-14, when the data you have based your report on finished, and now is quite a number of years and there have been quite significant changes, with the introduction of SuperStream and the clearing house; there have been a number of changes made. Do you think the inferences taken from your report are still as accurate—

Mr Morris : I think so.

Senator HUME: with the introduction of all these new ways of addressing the specific problem that you have referred to?

Mr Morris : Again, I think that we found the administration overall was generally effective. Again that was quite positive. But I suppose what we have seen from the ATO's submission is that it does not seem as though there are real marked changes in quite a lot of the areas. I think we were reasonably positive towards their education material anyway, and they have done some more work there, particularly on the calculators, where we said it was difficult for employees to look at the employee notification calculator and for employers to use the SG charge one. That seems to have been improved. We had some recommendation that maybe employers should be made more aware of the ATO's compliance activities and their function there. That was not picked up in the ATO review; so we are not sure what has happened there. Again, as much as anything, I think they have improved some of their employee notification work so that they can prioritise it more easily to move away from that to the higher returns from the compliance work—that is a positive—notwithstanding that they seem to have done a computer upgrade.

Senator HUME: So you think that, since your report, things have been moving in the right direction?

Mr Morris : That is right, notwithstanding that they are doing computer upgrades in an area that does not seem to particularly need it. From just our first view of the ATO submission, it is in the recovery space. Certainly, when we did our report, we had similar proportions of around the 50 per cent or so being collected. A lot of that was because of the age of the debt collection because of insolvency. At that stage the ATO was saying that maybe the director penalty notices were going to make a big difference to the collectability of that debt. I think, in 2013-14 something like 1,400 of those notices were issued; we saw in the ATO's submission there were only in the realm of 800 or 900. So it seems as though that has not been used to particularly improve the debt collection. That really seems to be at a similar stage now as it was when we were doing our work.

Senator HUME: Does the ISA report that you referred to use data that is of the same age as the data that you also based your report on?

Mr Morris : It might be slightly later but not too different.

Senator HUME: I do not imagine that there would be a lot of data out there available after about 2014.

Mr Morris : No, I do not think it would change much.

Senator HUME: If you wanted to have any sense of accuracy, it would not—

Mr Morris : I do not think it would change a whole lot, whether it was one year older or not.

Senator HUME: Probably the ISA's recommendations then or assumptions are based on, again, what was occurring before a lot of these initiatives were implemented, things like the clearing house and the SuperStream—all these things that are actually helping to address the problem.

Ms Favre : Yes, some of these initiatives will have an impact, for sure; they will all have an impact. But if we look at them in more detail, if we look at the Small Business Superannuation Clearing House, that was identified by the ANAO in our report as a low-risk area anyway because the businesses that are choosing to adopt that method of lodging their superannuation guarantee—

Senator HUME: Are already obviously compliant.

Ms Favre : Yes, they are likely to be compliant.

Senator HUME: They are self-selecting.

Ms Favre : That is right.

Senator HUME: Yes, I agree.

Ms Favre : The Single Touch Payroll again will not be mandated for businesses with fewer than 20 employees before, I think—it is not in their submission—2020, and we know that the highest risk of noncompliance is in small businesses. So that will be good when it eventuates.

Senator HUME: So we are moving in the right direction; I think you are right.

Mr Morris : Yes. I think we are piloting it in 2018 for small business.

Senator HUME: I am going to say that I find a lot of the discussion in these hearings—in the hearings we have had today and the hearings we had last time around—has been about the size of the problem and I think they are actually all in vehement agreement that there is a problem. Quibbling about the size, I do not think, is actually very helpful. What we really need to do is talk about the solutions. I know that that is probably not necessarily your department's purview, offering up the solution. Actually, the name of the inquiry—I was thinking about that—is the impact of nonpayment of the superannuation guarantee and we have not really spoken much about the impact; we just talk about the size. Let us put the size aside. I know this is not really in your remit, but what are the solutions to this problem, based on the initiatives that are already in place today? What else can be done?

Mr Morris : Again, I think they were doing the sorts of things that they needed to do, given the legislation and the tools available to them. It seems that probably it is in that debt collection space in the director penalty notice sort of area where they can somehow get a greater hold of or returns from insolvent companies, whether they can get some considerable improvement there—I am not exactly sure how they do it—and similarly, really, if they can, get at the debt earlier. We had talked to the industry funds as part of our fieldwork and that was a suggestion that was made. But again, industry funds have different incentives as well and they often represent the employers and, when it comes to the table, we are not sure what they are going to do. They were probably the two areas where we are looking perhaps for some innovations from the ATO, but there was nothing evident to us that they were not doing; it was more just moderate improvements in the activities that they were undertaking.

Senator HUME: I would imagine that you would be quite encouraged by the conversation that we had with the previous panel, the working group—the fact that the working group has been established and that it is across departments. I find it encouraging that there is an awful lot of sharing of information. To begin with, there is agreement that there is a problem. Again, let us not quibble about the size of the problem or the extent of the problem, but everybody agrees that there is a problem and everyone agrees that we need to find solutions for it. I would imagine that you would find that quite encouraging, having identified this as a problem so many years ago.

Mr Morris : That is right. In fact, they have then gone through some of those steps to talk to the Fair Work Ombudsman and talk to some of the funds, and that is a positive thing.

CHAIR: I noted in your report that the ATO has established that there is a strong correlation between noncompliance with SG obligations and noncompliance with employer obligations more broadly. I think in the 2013-14 year, 88 per cent of employers selected by the ATO for an audit were found to be noncompliant with their SG obligations. They are already moving in that direction of starting to pinpoint where the problems are. Do you want to tell us how useful that correlation is?

Mr Morris : Again, it is very useful. The superannuation guarantee line was also already talking to the small business line, they were already talking to the lodgement line, but there was more that they could do to coordinate the strategies that would be particular to the superannuation guarantee. That was the reason for our recommendation 3. It seemed to us positive that, after that, they did have their working group, that superannuation—I cannot quite see the name of it here—but they did have their working group across the ATO to focus on the education and compliance activities for the super guarantee and to share some of the approaches that the super guarantee line used in their audits with the small business line and vice versa.

CHAIR: Would you agree that constructing a model to calculate the size of the problem helps us to understand the size of the issues related to noncompliance?

Mr Morris : Yes. Again, I think it would be useful, yes. I think that would be the main benefit of the super guarantee gap estimate; it would give a greater certainty about what the level of noncompliance is and that could influence the resourcing decisions in the first instance rather than the particular strategies that the ATO might adopt.

CHAIR: In your report, you said that there was scope for the ATO to revise its assessment of the groups of employers and industry sectors most at risk. What do you say about their journey in that direction so far?

Ms Favre : Based on their submission, it is not clear that they have gone that way, in terms of doing further work to understand the level of compliance in these sectors, but certainly the ISA report is a step in this direction. There were already reports at the time of the audit that also indicated that there was a sizeable problem in these sectors.

Mr Morris : But I think the ATO have done some work on their risk models, to the extent they have the employer risk model and the industry risk model. I think they have taken on board some of our suggestions and then had some more ideas of their own about how they could adjust the model that they had in place in 2013-14.

CHAIR: In terms of your expectation of what the ATO was going to do in this area based on its response to your report, you have indicated that they have fallen short of your expectation. I am just trying to get a sense of whether this is one of the rare occasions when an agency has promised something and failed to deliver. I am just trying to get a feel of whether this is a minor infringement or one of the areas where you would say this has been a major failure by an agency.

Mr Morris : I think, again, we did have a look at recommendations 1 and 3 and we looked at them in some detail as part of that other audit and thought that they had taken the steps they needed to take. We note that they are lagging in doing their gap analysis and we also note that they are taking other steps to try to address some of the really difficult problems in addressing insolvencies and are trying to get a handle on nonpayment more quickly. I think it is a difficult area that they are continuing to try to address. I think it is just taking quite a long time to get many results from that because it is difficult to get those incremental improvements.

CHAIR: That was a very diplomatic answer.

Mr Morris : But I think that is where we believe it is at.

CHAIR: I have no further questions. Thank you very much for appearing before us today.