How superannuation works

As of March 2024, the total assets in Australia's superannuation system have reached a staggering $3.9 trillion, making it one of the largest retirement savings systems in the world. This highlights the significant role superannuation plays in the country's financial ecosystem. Yet, navigating the operational intricacies of superannuation from a payroll perspective can be complex.

In this article, we guide you through the nuts and bolts of managing superannuation contributions and ensuring compliance, helping you streamline processes within your business. In the following sections, you'll find information on the types of superannuation contributions, your legal obligations as an employer, how to calculate employer contributions accurately, and the importance of thorough reporting.

Plus, we'll explore how Rippling’s automation capabilities can simplify your business's superannuation account management, allowing you to focus on what matters most—growing your business.

All information contained in this article is accurate as of 22.08.2024. For the most up-to-date information, please refer to the Australian Taxation Office.

Understanding superannuation contributions

Superannuation contributions fall primarily into two categories: compulsory employer contributions known as the Superannuation Guarantee (SG) and employee voluntary contributions, which include salary sacrifice arrangements.

Employer contributions: Superannuation guarantee

The Superannuation Guarantee is a mandatory contribution that you must make on behalf of your eligible employees. As of July 2024, the SG rate is 11.5%, calculated on the employee's ordinary time earnings (OTE). This rate will increase to 12% by July 2025.

Key details

• Ordinary time earnings: Calculate SG contributions based on OTE, which generally include base salary, shift allowances, and commissions, while excluding overtime payments. You need to understand what constitutes OTE to ensure you make accurate SG contributions.
• Minimum earnings threshold: Employees under 18 must work over 30 hours per week to qualify.
• Reporting and payment schedule: You are to pay SG contributions at least quarterly. The due dates are:
  
• 1st Quarter (July-September): Due by 28 October
• 2nd Quarter (October-December): Due by 28 January
• 3rd Quarter (January-March): Due by 28 April
• 4th Quarter (April-June): Due by 28 July

You must use SuperStream via the Australian Taxation Office to make these contributions electronically, ensuring you transfer both the payment and the associated data in a consistent format.

• Penalties: Failing to pay the SG on time results in a Superannuation Guarantee Charge (SGC), which includes the unpaid SG amounts, interest, and an administration fee. Importantly, the SGC isn’t tax deductible, adding further financial implications for non-compliance.

Learn more about the superannuation guarantee rate for 2024

Employee voluntary contributions

In addition to the compulsory SG contributions you make, employees can opt to make personal super contributions, known as voluntary contributions, to enhance their retirement funds. Although it’s the employee's choice to make these additional contributions, as the employer, you facilitate this process by handling the payroll deductions and ensuring the contributions are deposited into their super fund, whether they choose pre-tax (salary sacrifice) or post-tax (non-concessional) options.

Key details

• Salary sacrifice (concessional) contributions: These contributions involve an agreement between you and the employee to redirect a portion of the employee’s pre-tax income into their super fund. These contributions are subject to a concessional tax rate of 15% within the fund, potentially lowering the employee’s taxable income and boosting their retirement savings.
• After-tax (non-concessional) contributions: Employees can also contribute to their super fund from their after tax income. These contributions aren't subject to tax when they enter the fund, but they do count towards the non-concessional contributions cap.
• Contribution caps: The concessional (pre-tax) contributions cap for the 2024-25 financial year is $27,500, while the non-concessional (post-tax) cap is $110,000. Exceeding these caps can attract additional tax liabilities.
• Timing and reporting: Super funds must process voluntary contributions before the end of the financial year to count towards that year’s caps. You should make contributions promptly to an employee's super account to avoid penalties or missed opportunities for tax benefits.

Superannuation fund types and options

When it comes to choosing a superannuation fund, both employers and employees have several options, each with distinct characteristics, benefits, and obligations. It's important to understand and compare super funds in order to make informed decisions that align with financial goals and regulatory requirements.

Retail funds

• Description: Financial institutions, such as banks and investment companies, typically run retail superannuation funds, which are open to the public. These super funds offer a wide range of investment options, catering to various risk appetites and financial strategies.
• Fees: Retail funds generally charge higher fees compared to other types of superannuation funds, as they aim to generate profits for the financial institution managing them.
• Suitability: These funds are often suitable for employees who value extensive investment choices and are comfortable paying higher fees for potential tailored investment strategies.

Industry funds

• Description: Originally, industry funds served employees in specific sectors like hospitality and construction, but now anyone can join. Not-for-profit organisations manage these funds, returning profits to members.
• Fees: Industry funds tend to have lower fees compared to retail funds because of their not-for-profit status, making them a cost-effective superannuation fund option for many employees.
• Suitability: Industry funds are well-suited for employees who prioritise lower fees and are content with a narrower range of investment options that still cater to different risk levels.

Corporate funds

• Description: Companies can establish corporate super funds for their employees. These super funds can either be employer-sponsored, tailored specifically for the company’s employees, or part of a larger corporate superannuation plan managed by a third-party provider.
• Fees: Depending on the employer’s arrangement, corporate funds may offer competitive fees, especially if the employer covers some of the administrative costs.
• Suitability: Corporate funds are ideal for employees of the sponsoring company, particularly when the employer negotiates favourable terms or contributes additional benefits.

Self-managed superannuation funds (SMSFs)

• Description: Members privately manage SMSFs and also serve as the trustees. This setup gives individuals full control over their investment decisions, including the ability to invest in assets like property and shares.
• Fees: While SMSFs can offer personalised control over investments, they often come with higher administrative and compliance costs. Managing an SMSF requires significant financial knowledge and a personal commitment to meeting regulatory obligations.
• Suitability: SMSFs are best suited for individuals with substantial superannuation balances (generally recommended to be at least $200,000) who want greater control over their investments and are willing to manage the fund’s legal and financial responsibilities, including overseeing their own contributions.

Employer obligations regarding choice of super fund

Employers are legally required to offer their employees a choice of superannuation fund, with a few exceptions (e.g., if the employee is covered by a specific award or agreement that mandates a particular fund, for instance, the Health Support Service Award). This process involves providing employees with a Standard Choice Form, which they must complete to nominate their preferred super fund.

Key points

• Default fund: If an employee doesn't choose a fund, you pay their super contributions into a MySuper product within the employer’s default superannuation fund. MySuper products are simple and cost-effective, designed to meet the needs of employees who don't wish to actively manage their super.
• Record keeping: You must keep records of the completed Standard Choice Forms and ensure that you make contributions to the correct fund within the required timeframes.

Assisting employees in selecting appropriate super funds

Employers play an important role in helping employees understand their super fund options. While employers can't provide financial advice unless they're licensed to do so, they can offer resources and general information to help employees make informed decisions. Below, you can find some of the ways you can assist employees:

• Provide educational resources: Share information about the different types of super funds, investment options, and potential fees associated with each. You can offer access to seminars, online tools, and resources that explain the basics of superannuation.
• Encourage professional advice: Suggest that employees seek advice from a licensed financial advisor if they're uncertain about which super fund to choose. You can also facilitate access to financial counselling services.
• Communicate regularly: Keep employees informed about any changes to superannuation regulations, contribution rates, or employer-related benefits that could affect their superannuation decisions.

A step-by-step guide to calculating superannuation

Calculating superannuation contributions correctly is imperative for compliance and ensuring employees receive their rightful amount. Here’s a step-by-step guide to help you navigate this process, with specific examples to clarify each step:

1. Determine the base salary

The first step in calculating superannuation contributions is to determine the employee’s OTE, which generally includes:

• Base salary: The regular pay for ordinary hours worked.
• Allowances: Such as shift loadings and commissions, but excludes travel allowances.
• Bonuses: If they're tied to performance during regular working hours.

Example: If an employee earns a base salary of $6,667 per month and a performance-related bonus of $833, their OTE for the month is $7,500.

2. Exclude overtime payments

Overtime payments are generally excluded from the OTE used to calculate superannuation. This exclusion is because overtime isn't considered part of an employee’s ordinary hours of work.

Example: If an employee earns $500 in overtime payments in a month, this amount is excluded from the OTE.

3. Calculate the superannuation contribution

Next, calculate the superannuation contribution based on the OTE for each pay period. As mentioned, the SG rate as of July 2024 is 11.5%.

Example: For the monthly OTE of $7,500:

Superannuation contribution = 7,500 × 11.5% = 862.50

The employer would calculate $862.50 as the superannuation contribution for that month.

4. Aggregate contributions quarterly

Although you calculate superannuation contributions for each pay period, you pay the accumulated contributions to the superannuation fund quarterly in line with the ATO's quarterly deadlines.

Example: For a quarter consisting of three months, if the employee’s OTE remains constant at $7,500 per month:

Quarterly superannuation contribution = 862.50 × 3 = 2,587.50

The employer would contribute $2,587.50 to the employee’s super account for the quarter.

5. Review and adjust for accuracy

It’s essential to regularly review your calculations to ensure accuracy and compliance, especially when considering elements like bonuses and varying work hours. Any errors can result in underpayment or overpayment, leading to potential penalties.

Superannuation reporting and compliance

Ensuring compliance with superannuation obligations involves accurate reporting to the Australian Taxation Office and maintaining thorough records. Here’s an overview of what you need to know:

1. Quarterly reporting cycles

There's a requirement for you to report superannuation contributions through SuperStream at least quarterly. The deadlines for quarterly superannuation reporting align with those for quarterly superannuation guarantee contributions (28th January, 28th April, 28th July, 28th October).

For SMSFs, the trustee has additional reporting obligations, specifically for certain events that affect a member’s transfer balance account, such as starting a retirement phase income stream. The reporting deadlines depend on whether the SMSF is an annual or quarterly reporter, which is determined by the total super balance of all members. This reporting is done through the ATO's online services, separate from SuperStream, and accessed via the ATO’s Business Portal or myGov.

2. End-of-year summaries

At the end of the financial year, you must provide a summary of the superannuation contributions you have made for each employee. This is often included in the employee’s annual payment summary or income statement.

Key points

• Income statements: With Single Touch Payroll (STP) now mandatory for all employers, income statements are provided directly to the ATO. Employees can access their income statements through their myGov account. These statements include details of all superannuation contributions made throughout the year.
• Annual contribution reports: You may also need to provide an annual report of contributions to superannuation funds, especially if they’ve an arrangement with a particular super fund.

3. Importance of maintaining accurate records

Maintaining accurate and up-to-date records is an essential element of ensuring compliance with superannuation obligations. Inaccurate or incomplete records can lead to significant penalties.

Key record-keeping practices

• Documentation: Keep detailed records of all superannuation payments, including the dates, amounts, and the superannuation fund to which you made the contributions. Also, maintain records of any Standard Choice Forms that employees submit.
• Reconciliation: Regularly reconcile your payroll records with your superannuation payments to ensure accuracy. This process helps identify and correct any discrepancies early.
• Compliance checks: Periodically review your superannuation processes to ensure they meet ATO requirements. This includes checking that you're using the correct OTE for calculating contributions and that payments are made on time.

Avoiding penalties

• Superannuation Guarantee Charge:  If you miss a payment deadline or underpay, you may be liable for the SGC. The SGC includes the shortfall in contributions, 10% interest per annum, and an administration fee. It's important to note that the SGC is not tax deductible.
• ATO audits: The ATO regularly audits businesses for superannuation compliance. Maintaining accurate records and timely reporting reduces the risk of penalties during these audits.

Automating superannuation with Rippling

Managing superannuation can be a daunting task, but Rippling’s all-in-one HR solution simplifies the process by automating key aspects, ensuring compliance, and reducing administrative burden.

• Standard Choice Form facilitation: Rippling integrates the distribution and collection of the Standard Choice Form directly into its seamless onboarding process, simplifying the way new employees select their preferred superannuation fund. This saves time and ensures compliance from the start.
• Automated updates: Rippling’s system continuously updates to reflect changes in superannuation rates and contribution caps, ensuring your business remains compliant with the latest regulations, without manual intervention.
• Effortless superannuation calculations: Rippling automatically calculates and sends superannuation contribution data to the super clearing house (SuperChoice) each pay run. This ensures accurate, timely contributions, minimises errors, and frees up time otherwise spent on manual processing.
• Efficient handling of errors and reprocessing of payments: If superannuation contributions can’t be processed, Rippling automates the refund process by returning funds to a designated Australian bank account, enabling quick re-attempts at allocation.
• Support for quarterly payments: Rippling supports quarterly superannuation payments using the ABA file option and automatically aligns with the ATO’s reporting deadlines, ensuring timely compliance and simplifying the payment process.
• Seamless reporting and record-keeping: Rippling integrates with the ATO’s SuperStream system for seamless reporting and record-keeping to help you stay prepared for audits, and meet compliance requirements effortlessly.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.