By Sean Melbourne
Employers are currently required to contribute 9.5% of their employees’ ordinary time earnings into a superannuation fund. The compulsory contribution rate is set to increase to 10% on 1 July 2021 and then gradually increase to 12% by 1 July 2025.
Given these changes will impact businesses’ bottom line, now is a good time for SMEs to understand the two different ways you can remunerate your employees. Option 1: Contribute super on top of base salary. Option 2: Build in super to a total remuneration package. The approach you take will affect how your business is affected by the coming increases in the compulsory super rate.
We look at the questions that SMEs should be asking, and how you can avoid a costly error simply due to not being aware:
- How will payments change when the super increases come into effect?
While superannuation is a compulsory contribution, employers have a choice in how they structure it in their employees’ remuneration. It can be paid in one of two ways: ‘base salary plus super’ or on a ‘total remuneration’ basis that includes salary and super in a total remuneration figure. We’ve broken down what these two approaches will look like as the compulsory super rate increases:
|Base salary plus super
|$100,000 (salary) + $9,500 (9.5% super)
|$100,000 (salary) + $10,000 (10% super) = $110,000
|$100,000 (salary) + $12,000 (12% super) = $112,000
|Total remuneration basis
|$100,000 remuneration: $90,500 (salary) + $9,500 (9.5% super)
|$100,000 remuneration: $90,000 Salary + $10,000 (10% super) = $100,000
|$100,000 remuneration: $88,000 (salary) + $12,000 (12% super) = $100,000
In the ‘base salary plus super’ model, the total payment increases as the compulsory super rate rises. On the other hand, in the ‘total remuneration’ model the total payment stays the same, despite the compulsory rate increasing. However, your employee’s take-home salary would decrease to account for the increased super contribution.
- Will I incur additional costs when the super contribution rate increases?
If you operate using the first model (base salary plus super), you will incur additional costs when the compulsory super contribution goes up. The base salary you pay your employees will not increase, however the amount of super you must contribute for each employee will.
If you operate using the second model (total remuneration), you will not incur these additional costs because the total amount paid will not change.
- How do I find out which way we pay our employees?
To find out the approach that applies to your employees, check the remuneration provisions in your employment contracts. If they say that the employee will be paid base salary plus super, when the compulsory super rate increases you will need to increase the super contributions you make. If there is total remuneration wording that allows the overall remuneration to stay the same when the super rate increases, you won’t need to do this.
- Should I be paying on a ‘total remuneration’ basis?
If you want to pay on a ‘total remuneration’ basis to avoid increased employment costs when the super rate increases, you need to have well drafted remuneration provisions. They should state clearly:
- what the employee’s total remuneration is;
- that the total remuneration includes base salary and compulsory super;
- that the compulsory super rate is scheduled to increase over time;
- when the compulsory super rate increases, the employee’s total remuneration will stay the same and the base salary will be reduced to enable this.
No employee will like having their base salary reduced, so it’s important that SMEs discuss with employees up-front and agree how their remuneration will be affected by the compulsory super rate increases. For all employers it will be a balance between keeping your employees happy and keeping employment costs, and cash flow, manageable.
If you need a hand determining how the super rate increases will affect your business, or would like to make changes to your employment contracts, contact our head of employment law, Sean Melbourne at firstname.lastname@example.org.