Pam Roberts
Technical

Industrial Revolution Part 2: Modern awards commence…..Now what for superannuation?

By Pam Roberts

In the October 2009 @dviser, we discussed the impact on superannuation of the new modern industrial awards that were due to commence on 1 January 2010. Since then, these awards have commenced with some further developments, particularly in relation to state employers. In this article, we talk about these new developments and provide some assistance for advisers dealing with employers in the new industrial world.

1. Summary of Fair Work and the modern awards

As a part of the Rudd Government’s reform process for industrial relations, the Fair Work Act, the Australian Industrial Relations Commission (now called Fair Work Australia or FWA) was given the job of consolidating upwards of 1500 old awards and agreements into 122 broad-based “modern awards” to commence 1 January 2010. The new modern awards are minimum rates awards, meaning employers just need to meet the minimum set out in the award. FWA drafted model clauses for the new modern awards, including new superannuation clauses.

2. Coverage of the modern awards

The Fair Work Act and the modern awards have been issued under the corporations power of the Commonwealth Constitution. This means the legislation automatically covers all employers who are corporations. Also, all states except WA have handed their industrial powers to the Commonwealth, so it will also cover most unincorporated employers (such as sole traders and partnerships) as well.

The following employees are covered by the new modern awards

  • Employees of employers that are commercial corporations (including not-for-profit corporations) from 1 January 2010.
  • All other employees in Victoria, Australian Capital Territory and Northern Territory from 1 January 2010, although the Victorian Government may review whether coverage will extend to state and local government employees.
  • All other private sector employees in New South Wales, Queensland, South Australia and Tasmania. State and local government employees remain covered by state industrial law except in Tasmania where local government employees are already covered by the Federal system. State awards will continue to operate for 12 months, until 1 January 2011 when the modern awards will apply. Employees not previously covered by awards will be covered from 1 January 2010.
  • Employees covered by old federal enterprise awards can continue to be covered by these old awards until January 2013 when they will be rationalised into new approved enterprise agreements or into modern awards. Those covered by enterprise agreements are excluded from the modern awards.

The following employees are not covered by the new modern awards

  • Where covered by a certified or approved enterprise agreement. New enterprise agreements can be approved by FWA and existing ones continue until they terminate under current arrangements.
  • Where the employee is a high income earner, ie earns $108,300 or more (indexed). Earnings are measured on a package basis, but exclude bonuses, non-guaranteed overtime and Superannuation Guarantee (SG) contributions. For part-time employees, the full-time rate is used to measure whether the employee is above the threshold.
  • Western Australia’s (WA) employees where the employer is not a company. WA did not pass industrial powers to the Commonwealth and will remain separate.

3. Superannuation clauses in the modern awards

The superannuation clauses follow the model modern award drafted by the FWA.

  • Superannuation Guarantee (SG) law and the Superannuation Industry Supervision Act and Regulations govern superannuation rights. This means:
    - no super award contributions are required unless there is an obligation to make them under SG law. For example, no SG contributions are required after age 70 unless set out in a certified/approved agreement;
    - if an employer breaches the SG requirements, they also breach the award, with additional penalties; and
    - where an employee has an Australian Workplace Agreement (AWA) or enterprise agreement that identifies a super fund for contributions, that employee has been deemed to have made a “choice” of fund under SG law. Therefore, default fund provisions in the modern awards do not apply.
  • Where the employee does not choose his/her own fund, the default superannuation fund is named in the award. The model super clause provides:

    “If an employee does not choose a superannuation fund, any superannuation fund nominated in the award covering the employee applies……. the employer must make the superannuation contributions provided for in clause X and pay the amount authorised … to one of the following superannuation funds or its successor:
    (a) (named industry fund); …..
    (i) any superannuation fund to which the employer was making superannuation contributions for the benefit of its employees before 12 September 2008, provided the superannuation fund is an eligible choice fund.”

    FWA has advised that if a particular super fund has been named in an old award, the applicable modern award can be varied to include that super fund as a default fund.

    As set out above, the “model” super clause was amended to provide that a default super fund included a successor fund to a super fund named in the award (including a pre 12 September 2008 fund). However, as this was a later variation to the “model” clause, some modern awards have yet to be varied to include this provision.

  • An employer must comply with an employee’s request to make post tax personal contributions to the super via payroll deductions.

4. Issues arising from the modern awards

  • Employers need to check whether SG contributions are meeting the “ordinary time earnings” definitions under the applicable modern award.
  • Employers with certified/approved agreements need to check whether those agreements cover all employees under the high income threshold of $108,300 pa.
  • Employers are now required to deduct from pay and forward personal superannuation contributions. Employees must make the request in writing and can only vary it with three months notice. Payments must be made within 28 days after the end of the month the payroll deduction is made.
  • Employees on packages under $108,300 pa may be limited on the amount they can salary sacrifice into superannuation, as minimum award wages under the modern award will apply. For example, Joe (age 55) has a salary package of $80,000 pa and wants to salary sacrifice $45,000 into super, bringing his salary down to $35,000 pa (ie the 15 per cent marginal tax rate). However, under the modern award, the minimum pay rate for his classification is $45,000 pa and as a consequence, he is unable to salary sacrifice below this amount.

5. Default super fund grandfathering issues

  • Existing corporate/employer superannuation plans can continue to be default super funds under choice of fund and the modern awards, as long as the employer has been making contributions to the fund since before 12 September 2008.
  • Therefore, an existing (grandfathered) corporate/employer super plan can be the default fund for new employees of the employer.
  • Where a business acquires another business and employees are transferred to the acquirer, these new employees can join the acquirer’s existing (grandfathered) corporate/employer super plan.
  • For a new employer starting up, the new corporate/employer super fund will need to be named in the approved enterprise agreement as the default super fund. If the employer is not intending to enter into an enterprise agreement with its employees, the employees will have to actively choose the corporate/employer super plan.
  • Existing employers who wish to transfer their current employer super arrangement to a new master trust corporate/employer super plan will need to ensure that it is done under a successor fund arrangement and the applicable modern award has provided for successor fund arrangements.

6. New corporate/employer superannuation plans and choice

Since the introduction of the modern awards and the limitations on default funds under these awards, the role of an employee’s “choice” in fund selection has become paramount. Under the new industrial relations system, the vast majority of ordinary employees will be covered by the modern awards and the awards will name the default super fund. Consequently, if an employer wants to set up a new corporate/employer super plan for employees, the options are limited:

  • Employers may choose to enter into an approved enterprise industrial agreement with employees covering all terms and conditions of employment, naming the new plan as the default fund.
  • Employees will need to choose the new corporate super plan. This means employees will need to have a role with financial advisers and employers in the setting up process of a new plan. Involving employees in the decision making process early has added long term advantages, as employees become more aware of the importance and value of their super savings and the need to plan for their retirement.

Adviser update:

Legislation tabled providing tax relief for superannuation successor fund transfers

The Tax Laws Amendment Bill (No 6) 2009 has been tabled granting tax relief to superannuation funds merging or transferring under successor fund provisions. Merging funds can agree to transfer capital losses from the transferor fund to the transferee fund of a global or individual asset basis. Some revenue losses can be transferred as well. The new legislation is much broader that the original draft. The original draft appeared to be targeted only at merging industry fund transfers and not master super funds transferring or merging. The Bill was tabled in Parliament late November 2009 and is due to be debated in February 2010.

Relief for transfer of s.290-170 notices

A welcome inclusion in the new Bill is a provision that allows merging/transferring super funds some relief on receiving s.290-170 notices prior to the transfer. Currently, a member must put in an s.290-170 notice before the successor fund transfer if he/she wants to claim a tax deduction for personal contributions made to the releasing fund. Under the Bill, the receiving (successor) fund can accept an s.290-170 notice and/or variation after the transfer takes place, as long as the merging funds have elected to transfer losses from one fund to the other.

Adviser Note: The IOOF Group is undergoing a process of integrating a number of master superannuation funds through a series of successor fund transfers. As the above Bill has not been passed, we have/will be seeking s.290-170 notices with transferring members under the current law. However, for the handful of members who don't know the exact amount they need to claim as a deduction, we will accept a variation notice sent in after the transfer to adjust down any deductible amount, even if the legislation does not pass. In the unlikely event the legislation does not pass, we will seek a "no action" stance from the Australia Taxation Office in respect of these few variations.