From 1 July 2023, new changes to superannuation have come into effect. When you have looked at your recent financial reports for Q1 of the 23/24 financial year, you would have noticed that your super payments have increased compared to last quarter.
The new reforms carry an additional charge of 0.5%, a seemingly small figure that can make a significant difference in the overall financial outlook of your business. This is a good example of why you must be well-prepared for regulatory changes so you can ensure that your profit margins can withstand these increased resourcing costs.
In this article, we will delve into the reasons behind the increase in super and provide insights into what future rises are expected.
Changes in Super Contribution
In Australia, superannuation, often called ‘super’, is a mandatory retirement savings program funded by employers’ contributions; sometimes employees will make additional contributions. By law, employers must pay a percentage of an employee’s ordinary time earnings into a superfund. As of 1 July 2023, this super guarantee (SG) is set at 11%, marking an increase from the previous 10.5%. This percentage will incrementally rise until it reaches 12% by July 2025.
The responsibility of making super contributions primarily falls onto the employer. Employers are obligated to pay the super guarantee for employees who are 18 years or over and are earning $450 or more before tax in a month. It also applies to employees under 18 years if they work more than 30 hours per week. This super contribution is separate from an employee’s salary or wage; it is an additional cost to the business. Superfunds then invest these regular contributions to grow the employees’ retirement savings over time.
Engaging contractors also carries super responsibilities that small business owners must know. If you employ contractors who are paid primarily for their labour, you may be required to make super contributions on their behalf. This stipulation applies even if the contractor has an Australian Business Number (ABN) or invoices you for their work. The crucial factor is whether the contract is wholly or principally for labour. If more than half the value of the contract is for the contractor’s labour, then super contributions may be necessary.
Consequences of Not Meeting Super Obligations
Failure to meet superannuation obligations can lead to severe penalties for business owners. Incorrect, late, or non-payment of super can attract legal action, fines, and penalties from the Australian Tax Office (ATO). The financial ramifications of such oversights can be significant, not to mention the reputational damage these can inflict on businesses. All business owners must ensure they are making accurate and timely super contributions for their employees and eligible contractors to avoid such repercussions.
As your accountant, we make sure you are making the correct super payments based on employee earnings and that you are updated with any changes. However, it is still the business owner’s responsibility to ensure that payments are made punctually, as failure to do so can lead to significant penalties.
A common strategy many businesses adopt is to set aside a designated amount for super and business activity statement (BAS) payments in a separate account. This dedicated account acts as a financial buffer, ensuring that funds are always available for making these payments. This approach can help alleviate stress on business cash flow.
Why are Super Contributions Changing?
The superannuation system is changing to better address the increasing life expectancy and financial needs of Australia’s ageing population. As people live longer, the need for sustainable retirement income strategies is becoming more crucial. By increasing the super guarantee (SG) incrementally to 12% by 2025, the government aims to ensure individuals have sufficient funds to sustain a comfortable lifestyle during their retirement years. This approach is designed to alleviate some of the pressure on the public pension system as the proportion of working-age people decreases relative to those in retirement.
The Need for Proactive Business Planning
Businesses need to be proactive and factor in the annual, incremental increases in superannuation into their forecasts and budgets. These small changes can have a substantial compound effect on your business’s overall financial health. The key to managing this lies in proactive business planning.
It’s important to take into account changes to wages, super and tax while planning your annual budgets and forecasts. Doing so helps to minimise the impact when the super guarantee (SG) increase takes effect each July.
Should you have any questions or concerns about these changes to the superannuation system – or if you are interested in performing a comprehensive review of your budgets and forecasts – please do not hesitate to reach out.