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Economics Legislation Committee

LINDEN, Mr Matthew, Director, Public Affairs, Industry Super Australia


Evidence was taken via teleconference—

CHAIR: Thank you very much for appearing before the committee today. I invite you to make a brief opening statement should you wish to do so. Do you have an opening statement for the committee?

Mr Linden : Certainly. I'll keep my remarks fairly brief. First, I'd like to indicate that Industry Super Australia, along with others appearing today, have had little time to consider the detail of this bill, considering other significant legislation that the government is consulting on at the moment. On face value, many of the provisions in the bill seem relatively straightforward. However, I would encourage the committee to test some of the propositions being advanced and whether they will achieve stated policy objectives. I will perhaps take each of the schedules in turn.

The first schedule deals with the SG amnesty. This enacts the government's decision to provide a time-limited amnesty for historical unpaid superannuation guarantee payments. At face value, we would hope that this results in the payment of superannuation guarantee amounts that to date have been unpaid. As the committee is aware, unpaid superannuation is a systemic problem affecting as many as one in three workers. The ATO has estimated cumulative unpaid superannuation to be worth around $17 billion over the past seven years. The key issue for the committee is whether the amnesty will actually work and trigger increased payment of historical SG amounts that would otherwise not be paid, given the ATO's current compliance activities and, of course, the enhanced compliance arrangements of Single Touch Payroll, which the committee has recently considered. The committee should also consider what sort of message the amnesty sends to employers who have done the right thing and paid their obligations as required under the law.

In the Australian context, we've had relatively few precedents for amnesties of this type. I'm not aware of any for superannuation. In the international context, there is a good deal of academic literature on tax amnesties, which would appear to be the closest parallel. That academic literature is mixed on the effect of amnesties, with recent work from the International Monetary Fund suggesting they may in fact be counterproductive and reduce future compliance, particularly if amnesties become a regular occurrence.

On this note, the explanatory memorandum suggests the amnesty will raise additional revenue totalling $101 million over the forward estimates period, including what appears to be some ongoing compliance benefit. I would urge the committee to ask Treasury, when they appear later, how they arrive at these figures, since the amnesty means that the ATO will not collect any part 7 penalties, which can be worth up to 200 per cent of the SGC shortfall. Furthermore, it's unclear how this additional revenue might be forthcoming, and that has to do with tax treatment of superannuation guarantee payments. Whilst there are contribution taxes which government collects, these are also tax deductible, and the amnesty bill, of course, allows for these historical amounts to be tax deductible. If the firms which are paying these amounts are paying the headline company tax rate of 30 per cent, those tax deductions could exceed the amount of contribution tax revenue which is received on these amounts, so in fact there could be a net negative impact on revenue. But perhaps that's something which you could raise with the committee.

In respect of general penalty provisions and the amnesty arrangements, certainly in the Australian context there does appear to be greater success with amnesty when there's a carrot-and-stick approach—that is, if there's an incentive. A reasonable parallel is the gun buyback scheme following Port Arthur. There were obviously incentives for people to hand in prohibited firearms, knowing, however, that there was also a significant increase in penalties after the amnesty concluded. That's perhaps something which the committee should give some thought to—that is, whether or not, as well as having a carrot in the form of this amnesty, there's also a stick in the form of more transparent and larger penalties for employers which don't comply with their legal obligations.

I have some brief remarks around schedule 2, which is the SG exemption for multiple employers. We're generally supportive of these provisions in the bill, but we do wonder why the government is going to the trouble of providing a legislative framework for employees and their employers to opt out of the super guarantee. It wouldn't appear that this is a significant issue affecting many people, given the circumstances.

The bill does appear to contain sufficient protections and limitations for its application, but these provisions could be easily broadened in the future to provide a more general opt-out of compulsory superannuation payments, which we would be concerned about. We do wonder how extensively these provisions will be utilised, given that the alternative approach is simply for the excess concessional contributions to be withdrawn at the conclusion of a financial year when a cap has been breached and relevant additional tax paid. Finally, on schedules 3 and 4, these are integrity measures which impact almost exclusively on self-managed super funds and they have our support.

CHAIR: Thank you. For the sake of the record, can I take from your opening statement that you support the passage of this bill?

Mr Linden : I think the committee needs to carefully consider the detail of it. We've had very little time to look at the detail. We think that there are some issues which the committee should inquire further into. We're still considering, as I mentioned, some of the impacts of the specific provisions.

CHAIR: I should clarify then, you haven't had a chance to consult with your member funds on the idea of an amnesty? Have you had any feedback from your member funds on the idea of an amnesty and what the implications of that might be?

Mr Linden : We haven't had enough time yet to undertake detailed consultation with all of our member funds. I think the general proposition would be, of course, that funds would be supportive of unpaid superannuation amounts being paid for members who haven't received them, and that would be a good thing, so that's positive. I think the thing to balance that against though is the general message that an amnesty sends and whether or not, in fact, the amnesty will be effective.

As I said, the parallels that we can see around amnesties, and certainly tax amnesties, appear to be quite mixed with respect to their benefit. And, certainly, if they become recurrent things, which may occur if governments see that they can find additional revenue, they could be counterproductive. So, as I said—

CHAIR: Didn't you say, however, that you felt that the amnesty would essentially limit the additional revenue?

Mr Linden : Sorry, I don't—

CHAIR: Didn't you say that you think that the government is forgoing revenue by establishing an amnesty?

Mr Linden : It could do, and I think that's something that the committee needs to explore with Treasury this afternoon.

CHAIR: So there wouldn't necessarily be an incentive then to have additional amnesties?

Mr Linden : I think that's something that the committee needs to explore. As it stands at the moment, the explanatory memorandum, and no doubt the budget, appears to be benefitting from the announcement of the amnesty in respect to additional revenue. I would just put a question mark in the context of superannuation and whether or not that would result.

CHAIR: Do you think that an amnesty could potentially lead to greater ongoing employer compliance with the superannuation guarantee? And that once this amnesty is done, and the superannuation has been paid, that employers are more likely to be compliant in the future?

Mr Linden : This is a complex issue. If the amnesty is accompanied with some detailed communication to employers around SG compliance generally, and raises awareness of SG compliance generally, then it could do. On the other hand, the countervailing point of view would be that if employers form the view that this were to become a regular occurrence, then they may think that it's worth the risk to not pay superannuation under the prospect that there might be a future amnesty announced, and that seems to be the case in some of the international tax literature where things become quite problematic.

CHAIR: Has the government given any indication that there will be an additional amnesty, or an extension of the amnesty, that you've seen?

Mr Linden : Not yet. They've been very careful to say that this is a one-time amnesty. Of course, governments can change their policies and potentially announce future amnesties. Certainly the messages that the government have suggested thus far would be that it would have a one-time effect, but I think we will all be watching with interest to see what the effect of this particular change will be. As I said, for employers who think that it might be an occurrence in the future, it might reduce their compliance with the super guarantee.

CHAIR: Employers who fail to take advantage of the amnesty are facing higher penalties, of at least 50 per cent of the money owed, on top of that unpaid super. Do you think that that's enough of a stick to ensure that those employers that can participate in the amnesty should participate in the amnesty?

Mr Linden : I don't think, under what's been announced, that there will be higher penalties for employers that come after the SG amnesty. The current part 7 penalties which can be applied can be up to 200 per cent, and generally the minimum is 50 per cent, based on the current regulatory guidance which the ATO have in place. As I said, I think the effectiveness of this amnesty would be enhanced by having stronger penalties after the amnesty has concluded.

CHAIR: So you think the carrot is adequate but the stick isn't. Is that correct?

Mr Linden : Well, the stick is the existing part 7 penalties, so it's not providing an enhanced penalty relative to what exists today.

CHAIR: The 12 months jail, in extreme cases, for directors that fail to meet superannuation guarantee liabilities isn't extreme enough?

Mr Linden : I think what I was talking about was the part 7 penalties, which is what you asked me about.

CHAIR: Yes, sorry. Obviously this bill works in conjunction with the legislation that we were discussing not quite two weeks ago. The aim of the game clearly is a carrot-and-stick approach. I just want to clarify this: you feel that the carrot is there but the stick isn't, or you feel that the stick is inadequate. Is that correct?

Mr Linden : It's apparent at the moment, with the combination of the inadequate compliance regime and, potentially, penalties that aren't sufficient to have employers do the right thing—otherwise we wouldn't have the systemic problem that we have. Regrettably at the moment the way the SG regime works means that many employers may think that it's worth taking the chance to underpay or not pay their employees superannuation. If they're making use of an overdraft facility, the arrangements around the normal SGC shortfall and general interest charge can in fact mean that there is no financial disincentive for them delaying or not paying superannuation. They could find themselves better off for it. So I think there does need to be consideration of the penalty regime to make sure that the carrot-and-stick is effective.

Senator KETTER: Because of the period of time that has elapsed since the bill was introduced, I think you haven't had an opportunity to consider the bill in your normal processes, but I take it you don't have any other comments or concerns about other aspects of the bill, other than what you've already placed on the record in your opening statement.

Mr Linden : That's correct. There are four schedules in the bill. The second one, which obviously I made reference to in my opening remarks, was the SG exemption for multiple employers. It certainly may be the case that there are more employees potentially in a situation where they might breach the cap because of multiple employers. I wouldn't have thought, though, that it was a common circumstance. I just flag that the relevant amendments provide a framework to enable employees and employers to opt out of the superannuation guarantee. Appropriately in the bill they are limited to certain circumstances where a breach of the cap might come about if there are multiple employers, but I think it would be remiss not to flag with the committee that the particular framework that's being established could potentially be broadened in the future. I would note one of the key issues here—and certainly it's flagged in the explanatory material—would be that, notwithstanding these exemption notices which the ATO might provide, there's no guarantee that employees will get a commensurate increase in their remuneration if they forgo superannuation guarantee payments as a result of being granted an exemption certificate.

Senator KETTER: Just coming back to the amnesty issue: did the government inform you at any point before the introduction of this bill that they were going to introduce an amnesty?

Mr Linden : No. I think it would be news to many people within the industry. That said, the government may have wished to have not undertaken any consultation beforehand, given the particular time period within which it was operating and to ensure no incentive were provided to not comply. They seem to be dealt with in the relevant periods for the bill. It is a little bit unusual that we don't have consultation on an issue such as this.

Senator KETTER: Is an amnesty a measure that you'd look at to address the issue of non-payment or underpayment of superannuation?

Mr Linden : It's not something that has been raised before in the context of SG, superannuation guarantee, compliance. Greater benefits are likely to come about from an enhanced compliance regime, in particular with Single Touch Payroll, subject to the comments which I previously made to the committee about how that operates. The other key measure which we think could have a far more beneficial impact on superannuation guarantee compliance would be more closely aligning the payment of superannuation guarantee amounts to when wage and salary income is received by an employee. That disconnect at the moment provides a significant opportunity incentive and an incentive for some employers to use their employees' super as cash flow in their business. We think that's completely inappropriate.

Senator KETTER: How would you describe the government's activity on proactively taking action on superannuation guarantee underpayment?

Mr Linden : As I said to the committee previously, we welcome the measures that the government has announced, but they should really have occurred well before now. This is an issue that has dragged on for much longer than it should have. It's important that we move quickly to address the gaps in the compliance regime for the super guarantee, because there are millions of working people who have missed out on superannuation payments to which they're legally entitled. As I mentioned in the other hearings, this is an issue not just for individuals; it's an issue for employers who are doing the right thing and may be disadvantaged because other employers are not. It is an issue, too, for all other taxpayers and governments, because ensuring that people get their legal entitlements to superannuation means that, all things being equal, people should retire with higher superannuation balances, which in turn will take pressure off the age pension.

Senator KETTER: I'm just wondering whether you heard the ACCI or COSBOA testimony from earlier today?

Mr Linden : Unfortunately, I didn't, Senator.

Senator KETTER: Their submissions touched on this issue as well. One of the things that ACCI said, for example, is that missed payments can also arise because of natural disasters and systems outages. Do you think these are valid and fair arguments to explain why we've got a $5.9 billion superannuation guarantee gap?

Mr Linden : No, I don't. There may be circumstances where that occurs and there's currently some flexibility for the commissioner to deal with circumstances like that, but it's obvious that the problem with unpaid superannuation is systemic and not driven by administrative issues in particular. As I said, one of the key issues seems to be that some employers think it's legitimate to either not pay their employees superannuation and operate at a competitive advantage or use the existing law and make use of their employees' superannuation to bolster the cash flow of their business, which is a particular problem that needs to be addressed.

Senator KETTER: I think you've just answered my next question. I've heard this from other witnesses as well. We've heard complaints occasionally about the SG payment system being administratively burdensome. To the extent that it is, is that a valid argument to justify instances of non-payment?

Mr Linden : No. No doubt employers, and everyone else, need to pay taxes each year. It's a legal obligation. I would note that technology has come a long way in 25 years since the super guarantee was introduced. As I've previously told the committee, the current framework was perhaps legislated in view of some of the limitations around technology and some of the administrative burdens which might have existed in the past. However, today almost all employers are using electronic systems for accounting, invoices and payroll. They're readily available and they're very cost-effective. Once all the necessary information is inputted into them, the payment of superannuation just becomes a routine part of the pay cycle.

Senator KETTER: Have you done any estimates as to how much superannuation could come forward as a result of this amnesty?

Mr Linden : I am not aware of any academic literature. This may be an issue that you could explore with the Treasury later. There doesn't appear to be a particularly sound empirical basis to conclude what the effect of this would be. The effect is quite variable when we look at tax amnesties. Obviously, the explanatory memorandum suggests that there will be some increase in terms of one-off payments and some ongoing compliance benefit. That may paint an excessively rosy picture in terms of the effect of this amnesty. We hope that it's successful and people get paid what they're entitled to, but the evidence, certainly globally, seems to be quite mixed as to whether it will actually be effective.

Senator KETTER: Then there are employees who have unpaid SG from insolvent companies. Obviously, that doesn't get addressed as a result of an amnesty?

Mr Linden : No, it wouldn't. If a company has wound up and it's insolvent, to begin with it generally won't have spare cash or liquid resources to repay them, so it's not going to address that issue.

Senator KETTER: In summary, the issue of an amnesty is something that you haven't called for, and presumably your members haven't called for it. Tell us: what are the correct priorities? If we want to do something about compliance in the SG system, what are the right approaches?

Mr Linden : As I articulated to the committee the other week, the measures which improve visibility of superannuation guarantee amounts to both the tax office and to employees are essential. That is being done through Single Touch Payroll, with the caveat that some things need to be fixed in terms of its operation. The other key thing that we think needs to be addressed as a matter of urgency is the timeliness of superannuation guarantee amounts. The quarterly regime within which the system operates dates back to a former era. We think it's quite important that there's more timely payment of superannuation guarantee amounts to employees' superannuation accounts, ideally at the time of each and every pay cycle or, at a minimum, monthly. We think that would make a very significant difference in terms of ensuring that people could see and check more accurately whether an amount on their payslip has made it into their super account. As I said before, it perhaps reduces the temptation or opportunity for employers to use their employees' superannuation guarantee amounts for other purposes.

Senator KETTER: Thank you very much.

CHAIR: Thank you very much, Mr Linden, for joining the committee today.

Mr Linden : Thank you.

Proceedings suspended from 13:04 to 13:32