Income tax legislation starts off with good intentions but often ends up being overcomplicated and imposes draconian penalties. Two examples are the excess contribution penalty tax system in the superannuation guarantee charge.
This week the bill finally to fix the excess contributions system was introduced to Parliament for its second reading. Unfortunately, despite amendments made over the years, the penalty system relating to employers that do not meet their mandated superannuation responsibilities is still too complex and inflexible.
When the SGC penalty regime was first introduced it was so harsh and inflexible. Australian Taxation Office auditors, left with virtually no discretion, often turned a blind eye to inadvertent and minor breaches by employers. With the SGC contribution rate increasing from 9 per cent to 9.25 from July 1, some employers could find themselves embroiled in this overly complicated penalty system.
Under the SGC system an employer must pay contributions to a super fund by the 28th day of the month following the quarter that the contribution relates to. When these deadlines are not met, employers become enmeshed in an overly bureaucratic system and face penalties even when innocent mistakes are made.
An employer that either pays the SGC contribution late or does not pay enough - such as possibly may occur as a result of the SGC contribution rate increasing - is forced to complete a SGC statement. This, in most cases, results in the contribution for the employees being disallowed as a tax deduction.
In addition, the employer is charged a penalty interest rate on the late payments of 10 per cent a year and an administration fee of $20 an employee per quarter. This could result in employers that inadvertently do not pay the increased contribution for the first quarter of the new financial year paying a penalty that is equivalent to a sledgehammer being used to crack a sesame seed.
Take, for example, an employer with 10 employees who, due to a glitch with their payroll system, does not pay the extra 0.25 per cent for the September quarter. That amounts to a shortfall of $250. The employer is denied a tax deduction for the shortfall, incurs an interest charge, and must pay a $200 administration fee to the ATO.
Another amendment to the SGC system is the personal liability placed on directors of companies that do not meet their superannuation obligations for employees. This means directors can no longer hide behind a company structure and wilfully ignore their super obligations.
Just like the radical changes made to the excess super contribution system, the SGC system is long overdue for major change.