For the last seven years the superannuation contribution rate has remained unchanged at 9.5%. However, from 1 July 2021 the rate will increase by 0.5% to 10%, and it won’t stop there. The rate is legislated to continue to increase by 0.5% annually until it reaches 12% in 2025.

What does this mean for your business?

Depending on the remuneration arrangements in place with your employees, the change may result in an increase to your labour costs overnight.

Importantly, it should not be assumed that the income component of an employee’s salary can be reduced by 0.5% and redistributed to their superannuation fund. The ability to do so will depend entirely on the specific contractual arrangements in place.

How are compulsory superannuation obligations determined?

The first step in determining how, and by whom, the increase will be funded is to consider the employment contract.

If an employee’s remuneration is expressed to exclude superannuation contributions then, absent any other contractual provision (or a policy, procedure or custom and practice giving rise to an implied contractual position) the employer is likely to wear the costs of the increase to the employee’s compulsory retirement savings.

Conversely, where the salary or hourly rate is expressed to be inclusive of superannuation contributions and otherwise absorbs all employment entitlements owing to the employee (often referred to as an “absorption clause”) the employer may be able to redistribute the salary accordingly, instead of increasing its cost base. This means the take home pay may be reduced by the increase in superannuation.

What should you do?

Prior to the changes on 1 July 2021, closely consider the employment terms and conditions in place.

• If you have an “all inclusive salary” or “absorption” clause check it works.
• If you don’t, consider whether there is another contractual basis for achieving this.
• If not, develop a plan to manage the introduction of the increase for your business through contractual or administrative changes such as building the increase into planned pay rises.
• Consider any terms in an applicable industrial instrument that may affect your obligations regarding superannuation contributions.

If superannuation changes are causing your business concern, we are here to help.