Super's High Court showdown

Last week Assistant Treasurer Bill Shorten announced the government's response to the Cooper Review's recommendations on superannuation. Shorten would have been pleased at the near total, positive media coverage to his announcements.

But just a week earlier an event happened that has the potential to blow Australia's $1.4 trillion compulsory superannuation scheme apart. The High Court decided it would hear a constitutional challenge to the validity of the Superannuation Guarantee Act (SGA).

If the High Court were to declare the Act unconstitutional, employers would presumably no longer be required to deduct income from employees and to pay the money into superannuation funds. The potential implications are startling for the finance sector and Australia's key retirement savings system.

The case has to be taken seriously. The fact that the High Court agreed to hear the challenge means the Court considers there's constitutional doubt that needs resolving.

The challenge has been mounted by Roy Morgan Research, Australia's oldest and arguably most respected market research and public opinion survey company. In May 2010 they lost a Federal Court case that declared field interviewers they engaged as independent contractors to be employees. Therefore, Roy Morgan had to pay the interviews superannuation which was then backdated. Roy Morgan Research has been caught in a classic 'no win' snare that is the flawed design of the SGA.

The SGA says that superannuation is only paid on employees. Where people work as independent contractors they are paid more and look after their own superannuation. But if the Australian Taxation Office retrospectively decides that people who've been working as independent contractors are employees the business that engaged the contractors is hit with an additional superannuation bill. They cannot recover the over payment from the worker. In effect the snared business is double slugged the cost of superannuation. It's almost a 'sting' against businesses and it hits the independent contractors as well.

I've written about this before (The real sham in Shorten's super plan, November 19). The ATO has a neat trick called the '10 per cent rule.' Few people have heard of it. It says that if you work a combination of employment and self-employment you are denied normal taxation deduction entitlements for personal superannuation contributions you make. It's blatant discrimination against self-employed individuals and affects a huge percentage of Australia's 2 million self-employed trying to save for their retirement.

The consequence is that if you're self-employed and the ATO declares you an employee you may think you're going to receive a superannuation boost. But instead you'll receive a tax bill if you've made personal superannuation contributions. I know many people who've been caught and they see the system as totally unfair. On top of that the companies they previously worked for as independent contractors are hit as well.

The design of the system is a mess, yet it's aggressively applied by the ATO. It's like driving down a road with a speed sign that says "speed limit is 60 or 80 depending on the mood of the policeman that pulls you over.”

But with the constitutional challenge now being mounted this un-addressed design flaw could result in the entire superannuation system falling over. Having been 'bitten' Roy Morgan Research have responded by attacking the core legal underpinning of the SGA itself.

In the simplest reading of the constitution, the Commonwealth does not have the power to force a person paying you to take money from your payment and send it to someone else. But that's effectively what compulsory superannuation is. Employers take money from your wages and pay it to a superannuation fund. When the Keating government introduced SGA in 1992 they knew they could not do this. So they invented a tax trick because the Commonwealth has taxing powers.

The Superannuation Guarantee Act is tax legislation. If a business does not pay superannuation the business is charged extra 'tax' by the ATO, which then sends the 'tax' to a superannuation fund.

Roy Morgan Research is asking the High Court to declare that 'superannuation' is not 'tax'. For the layperson this would seem commonsense. The ATO put legal argument to the High Court that the case should not be heard explaining why superannuation is a 'tax.' I don't think I've ever read such tortured legal 'spin' but law is often a highly technical beast. Maybe superannuation is a 'tax.'

Whatever the High Court decides a problem exists. If superannuation is not a 'tax' parliament will have to find a legislative solution to SGA otherwise Australia's compulsory superannuation system collapses. If superannuation turns out to be a 'tax', the SGA's design discrimination against businesses and self-employed people has to be fixed. Such obvious unfairness shouldn't be tolerated.

Ken Phillips is executive director of Independent Contractors Australia and author of Independence and the Death of Employment.