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Over the past 12 months we have been actively involved in over 20 separate superannuation audits.
Whilst we had previously experienced a lot of ATO audit activity, I get the feeling that following the Australian National Audit Office (ANAO) report, Addressing Superannuation Guarantee Non-Compliance, a greater sense of urgency has been applied.
Add to this the introduction of Single Touch Payroll phase 2 (STP 2) and the increased audit activity shouldn’t come as a surprise. 
Not only have we seen the overall volume of audits increase, but we have also found the level of review increase, with most reviews being ‘transactional reviews’. A ‘transactional review’ is where the ATO reviews the transactional payroll data of the employer during the audit.
The thing about transactional reviews
ATO audits of transactional data should be a cause for concern for most employers. Whilst a number of employers have undertaken reviews of their wage code configuration, most have not reviewed their transactional data. In our experience, having collectively been involved in over 100 transactional reviews for clients ranging from ASX 5 to some of Australia’s largest not-for-profits, 30-40% of superannuation shortfalls arise from transactional errors, i.e. not the wage code configuration. Transactional errors can be difficult to find, with many payrolls comprising literally millions of lines of data, so of course there are many unknowns for the employer, and really no basis for comfort given the significant underpayments that have been identified for numerous employers.
Penalties arising
Superannuation is the most heavily penalised tax obligation. As a rule of thumb, the exposure arising from an underpayment of superannuation will be between 5 to 7 times the actual shortfall. That is, an underpayment of $10,000 comes with a financial exposure of between $50,000 - $70,000. How is this possible? Let's take a look:
*The SGC calculation requires the employer to pay the shortfall rate of superannuation against all salary and wages (including overtime and termination payments). A rule of thumb is a 30% gross-up.
**Assume 50 employees underpaid $200 each.
If we considered the ATO review period which is generally 5 years, this initial $10,000 exposure becomes close to $300,000. And this is assuming there are no late payments!
Lessons learned
Here are the top 5 lessons learned:
1. A voluntary disclosure, prior to audit, is best.
- From a financial perspective, where a voluntary disclosure is made, the Part 7 penalty will likely not apply. This likely reduces the cost closer to double the shortfall (as opposed to 5-7 times!).
- From a non-financial perspective, management of reputational damage, and employee sentiment, is far better when you are able to demonstrate you took a proactive approach to compliance, rather than get ‘caught’ in an audit.
2. A voluntary disclosure, following the commencement of an audit, is second best.
- Similar to the above, where a voluntary disclosure is made following the commencement of an audit, there should be a considerable reduction in the Part 7 penalty, although it is highly unlikely to be reduced to nil).
- Further, from a reputational perspective, it is better to demonstrate that following an initial audit, you immediately investigated the matter to ensure compliance.
3. The majority of audits are triggered by employee or contractor complaints, followed by STP2 data matching. However, we expect STP2 and data matching to be the biggest trigger in the future.
- The ATO has an online tool to report unpaid superannuation contributions. The ATO is obligated to consider every single complaint. In our experience, it doesn’t mean that every complaint will result in an audit, but there will be a level of inquiry by the ATO. Further, if a late payment has previously occurred, you can expect this will be discovered.
- In the May 2023 budget, the Government proposed an investment of $27 million in 2023-24 for the ATO to improve data capabilities, including data matching both employers and super fund data at scale. Further, an investment of $13.2 million to consult and co-design with stakeholders a new ATO compliance system to proactively identify instances of under or unpaid super in near-real time.
4. Transactional reviews are not only identifying underpayments, they are helping employers to introduce better controls and processes in their payroll function.
- When testing transactional accuracy, we also review and identify the cause of any anomalies. This is of significant importance because if we don’t understand why the anomaly occurred, underpayments will continue to arise.
- Frequent causes for transactional errors include manual adjustments, back payments, cash-out payments, Rostered Day Off (RDO) payments, and purchased leave.
5. Late payments occur regularly and greatly increase risk exposure.
- It has come as a bit of a surprise the amount of late payments which are being identified. Employers have an obligation to pay superannuation by the 28th day of the month following the conclusion of a superannuation quarter, as follows:
- For a payment to be made on time, it has to clear the employer's clearing house. Even if you are only a day late, it counts as a late payment, and the employer is required to lodge an SGC statement.
Final thoughts
The greatest lesson for superannuation audits is to avoid them in the first place. Ensuring you are reducing your risk of data matching through a detailed STP2 review is a great first step. Following this, a transactional review to ensure a high level of assurance is strongly recommended.
To the extent a shortfall is identified through this process, you are then able to make a voluntary disclosure and significantly reduce your overall costs. In addition, the ability to control the narrative and manage non-financial considerations is greatly strengthened through a voluntary disclosure process.
For more information
If you have not had the chance to consider your superannuation compliance, we would be happy to have a confidential discussion with you. Please contact Rick Kimberley, National GES Leader, or Gina Nedeljkovic, GES Leader, WA.
