From the 1st of July 2022, employers will again need to increase the mandatory super contribution from 10% to 10.5% of their employees’ salary. That means, employees and contractors (excluding those that structure their contracting under Pty Ltd arrangements) should see the super contribution rise in their latest paycheques.
This substantial change has ramifications for employers, including raising:
- The amount they pay to employees for superannuation.
- Their workers’ compensation premiums.
- Their payroll tax liability.
This is an increase from last year, which saw the contribution rising for the first time since 2014 from 9.5% to 10%. That was the biggest increase in the superannuation guarantee in the last 10 years; in recent history, the Federal Government increased super from 9% to 9.25% in 2013, and subsequently 9.25% to 9.5% in 2014. The government has planned further increases over the next few years, with it hitting 12% in 2025.
Do contractors need a superannuation increase?
The short answer is – generally yes.
The Australian Taxation Office has three conditions for paying a superannuation guarantee if you’re a contractor:
- If more than half the dollar value of a contract is for the contractor’s labour.
- If the payment for the job is for labour, not a deliverable.
- If the contractor doesn’t delegate the work.
CXC handles the superannuation contribution, as well as superannuation increases, to the contractor’s nominated fund. We do this for contractors engaged under tax structures such as PAYG and sole trader.
However, for contractors engaged under private companies or trust arrangements, they need to sort out super themselves. CXC engages these incorporated entities as sub-contractors who enter into an agreement with CXC that contractually obligates them to be responsible for all taxes related to the engagement (except payroll tax).
Like employees, calculating the superannuation guarantee is based on the contractor’s ordinary time earnings, as dictated by the contract. Make sure to leave our payments for equipment, overtime or GST.
What does the superannuation increase mean for contractors?
For many employees, where their total salary package is inclusive of super, they’re seeing their take home pay reduce to match their superannuation changes. For instance, we’re seeing major banks, such as ANZ, cut their employees’ wages.
CXC manages and payrolls our clients’ contingent workforces. In 2013, when the 9.25% superannuation guarantee increase was implemented, just 1% of our clients opted to give contractors the superannuation increase without reducing their take home pay. In 2021, we saw this number increase 20 fold, a trend that is likely to continue in 2022. That’s despite – or potentially because – an unprecedented global pandemic, which has seen employers both look to cost savings as well as finding ways to stem the talent shortage.
We predict that this number will slowly rise over the next four years of changes to superannuation.
How do clients decide whether to pass on the super?
As part of our services, we have seen a number of factors that influence whether companies chooses to pass the super increase on to the contractor, or deduct it from their take home pay. These include:
- What their contract dictates – For both permanent and contingent, if your contract stipulates that your package is inclusive of super, it’s likely that you’ll see a decrease in take home pay.
- Alignment between permanent and contingent – The primary reason we’re seeing employers not decrease a contractor’s take home pay, despite their contract being inclusive of super, is because that’s what the majority of their full-time workforce is doing. However, this still isn’t happening most of the time – of our clients that opted to not pass on the super guarantee to contingent workers, 70% of them did so for their permanent workforce.
- Talent shortages – We’ve recently discussed the talent shortage in Australia and how organisations are increasingly looking at ways of retaining contingent talent. Not reducing a contractors’ pay might be seen as a good way to start. Other employers are treating this as part of the year on year increase in rates, and not unreasonable.
- Executive sign off – although not a substantial increase in cost, an extra $170,000 increase in contractor spend (if a company has around 200 contractors) would often require executive sign off.
Last year, the government introduced legislation to ensure employers are setting up workers with their own default superannuation fund, not the preferred employer fund. Employers must now pay contractors into a ‘stapled fund’ (either the last fund that contributions were paid into, or the fund with the largest balance) rather than an employer’s default fund.
CXC sees the change as a positive one that will reduce administration for onboarding and management of superannuation administration for contingent workers.
We’ve already made changes to our process to comply with this legislation. They will ensure that contingent workers are provided with a complete view of their superannuation, as well as the opportunity to automatically find past superannuation accounts and consolidate these during their onboarding process.
Additional superannuation changes
Outside of the superannuation rise and stapled funds, the main changes that may affect your contractors include:
- Removal of the minimum threshold – previously, employers would need to pay workers at least $450 before they would need to make superannuation contributions. This has now been removed, meaning that all workers will be paid the guarantee, regardless of how little they earn.
- Removal of work test requirements – Previously, needed to be gainfully employed to make non-concessional contributions to their super if they were over 67. This has been extended to 75, meaning any worker under this age doesn’t need to pass a work test. Additionally, work test have been removed for salary sacrificed contributions.
These additional changes came into effect from July 2022.