Despite the best of intentions, employers will from time to time find that they have underpaid/late paid employee superannuation entitlements. Once an underpayment or late payment is identified, corrective action is required. One of the unfortunate consequences is the potential imposition of penalties.
It has been almost a year since the super guarantee (SG) amnesty ended on 7 September 2020.
The amnesty provided a window of opportunity for employers to disclose and pay previously unpaid SG charge (SGC), including nominal interest, for historical quarters starting 1 July 1992 and ending 31 March 2018 without incurring the Part 7 penalty.
In addition, employers were able to claim a tax deduction for SGC payments for any of the quarters if the payment was made on or before 7 September 2020, or the employer had entered into a payment plan (with the ATO) for the amount owing on or before that date.
Now that the amnesty period has ended, employers should be mindful of their SG obligations. Any unpaid or underpaid SG amounts will now be subject to the Part 7 penalty including additional SG shortfalls for the above prescribed quarters if the shortfall was not disclosed and paid by 7 September 2020 nor was it subject to an active payment plan entered into before this date.
Employers who have retained the benefits of the amnesty because of an active payment plan entered into before the end of the amnesty period may also be exposed to the Part 7 penalty if they subsequently fail to meet their SG obligations under that payment plan. The Part 7 penalty would apply to the remaining unpaid quarters that were subject to the SG amnesty.
The Part 7 penalty amount
The Part 7 penalty is equal to double the SGC payable by an employer for the quarter (i.e., 200% of the SGC) and is automatically imposed by the law. The Commissioner may remit all or part of the Part 7 penalty. However, in relation to SGC raised for quarters that were subject to the SG amnesty, the law does not permit the Part 7 penalty to be reduced by more than half i.e., not below 100% subject to certain exceptions.
The ATO approach to the remission of the Part 7 penalty
Over the years the ATO has issued a number of practice statement law administration guidelines (PSLA’s) dealing with the remission of the Part 7 penalty.
The ATO’s current approach for remission is set out in PSLA 2020/4 and was originally intended to apply to penalty remission for additional SG for quarters commencing from 1 April 2018. PS LA 2020/4 was subsequently annotated advising that the Commissioner’s decision-making principles for the remission of additional SG are currently being reviewed and that the principles in PSLA 2020/4 only apply to quarters that were subject to the SG amnesty (i.e., quarters ending on 31 March 2018 and earlier).
On 29 July 2021, the ATO issued draft PSLA 2020/D1 (comments from the public is now closed). PSLA 2021/D1 combines the principles in PS LA 2020/4 with the revised remission principles for quarters commencing from 1 April 2018. When finalised PSLA 2021/D1 will replace PSLA 2020/4.
This article explores the ATO’s current and provisional approach to the remission of the Part 7 penalty under the two PSLAs.
PSLA 2020/4 – ATO current approach
Unlike previous Part 7 penalty remission guidelines, PSLA 2020/4 explicitly directs and thus confirms that ATO officers are not permitted by the law to remit the Part 7 penalty below 100% of the SGC unless:
- the employer took voluntary action to lodge a SG statement prior to being notified of any ATO compliance action, or
- there are exceptional circumstances preventing the employer from lodging a SG statement either during the amnesty period or before the employer was notified of any ATO compliance action.
PSLA 2020/4 adopts a four-step remission process and broadly these are:
- Step 1: setting a base penalty having regard to the employer’s attempt to comply with their SG obligations;
- Step 2: assessing whether an uplift to the base penalty be applied based on the employer’s compliance history for both SG obligations and other taxation laws for the three-year period leading up to the voluntary disclosure or commencement of ATO compliance action (noting that an employer’s SG history will be given more weight);
- Step 3: identifying other mitigating facts and circumstances (it is worth noting that an example of a mitigating fact/circumstance provided is voluntary disclosure of a SG shortfall caused by incorrect classification of a worker as not being an employee under common law or the extended meaning of that term for SG purposes i.e., a person engaged under a contract wholly or principally for their labour); and
- Step 4: identifying exceptional circumstances that prevented lodgement of a SG statement prior to notice of ATO compliance.
PS LA 2021/D1 – ATO provisional approach
The remission process under PS LA 2021/D1 places a greater emphasis on an employer’s attempt to comply with their SG obligations having regard to the following:
- Step 1: the extent to which an employer has paid the SGC for which a late payment offset can and will be claimed;
- Step 2: the timing of the lodgement of the SGC statement for the identified SGC and whether any ATO compliance activities have commenced;
- Step 3: an employer’s compliance history for both SG obligations and other taxation laws for the three-year period leading up to the voluntary disclosure or commencement of ATO compliance action (noting that an employer who has demonstrated a history of lodging SGC statements late, or has several outstanding lodgements relating to other taxes will be given a poor compliance rating); and
- Step 4: any mitigating facts and circumstances that may warrant further remission.
Both PSLA 2020/4 and PSLA 2021/D1 contemplate penalty relief arrangements (wherein the employer is provided with additional remission in conjunction with a direction for education) for employers with a turnover of less than $50 million and they:
- took voluntary action to comply with their obligation to lodge SGC statements;
- do not have a history of lodging SGC statements late;
- have lodged no more than four SGC statements after the lodgement due date in the present case;
- have no previous SG audits where they were found to have not met their SG obligations, and
- have not previously been provided with penalty relief.
Where to from here?
TaxEd understands that despite current lockdown restrictions the ATO continues to take firm action with employers for non-compliance with their SG obligations.
Considering an amnesty was offered for past periods, the ATO has high expectations that employers will be proactive if SG shortfalls are identified. Given that the focus of PSLA 2021/D1 is on active compliance we recommended proactive early engagement with the ATO occur once an underpayment or late payment of superannuation is identified.