Changing the collection process for superannuation saves $billions, drugstore creates increased productivity in the workplace and better connects the owner of the funds with their investments
The coalition has a policy for the September election that will remove employers from the collection process for superannuation. If they win then superannuation will be included in PAYG payments to the tax office. The employers’ involvement will be only about collecting tax. The owner of the funds and the tax office can then work out what to do with the part of tax that is super and the super component would be sent to the nominated fund manager
The cost to the ATO of distribution of payments would be provided by the fund manager through a ‘commission on funds received’, ampoule ensuring there is no increase in costs for the ATO or any impact on the federal budget. This is based on user pays principles and would be around 1%.
Current and proposed process
Currently if a person is lucky enough to earn $100k a year then the employer will, decease over a year, give them $75k, pay the ATO $25k in PAYG tax and then find over $9k from somewhere else and send that to a fund manager.
We propose that the employer pays the employee a gross salary of $109k, of which we send $34k to the ATO and gives $75k to the employee. The employee, the person who owns the funds, will inform the ATO on which fund manager to send their money either at tax time or, with support from a fund manager, every pay day.
There will be a general increase in efficiency in the economy, as well as in the management of fund managers. This increase in efficiency will come mainly from saved time and expense for employers and for fund managers.
Some 800,000 employers would no longer have to send money off to over 800 fund managers on behalf of at least 17 million workers.
There will be improved, streamlined communications and processes for fund managers who will deal only with the ATO not with 800,000 employers. We have calculated this saving as more than $1 billion a year. That is a lot more money for their members.
Any extra costs for the ATO would come from a management fee of around 1% of funds distributed. Given that around $30 billion is collected every year that sees a net gain for fund managers of at least $0.7 billion per year.
This approach creates savings for the member/investor, for fund managers and for employers.
Fund manager benefits
Fund managers themselves will benefit in two ways; financially through administrative savings and corporately through having to become efficient in collecting funds and attractive to people making a decision on which fund they should use.
Currently fund managers receive payments from any number of employers (at least tens of thousands in the case of the very large funds). If a payment is not received the fund manager then needs to contact the employers, threaten the employers, contact members etc.
Under this proposal the fund managers would have one point of contact for contributions– the ATO.
If there are 800k employers and 17 million employees then the current monthly activity would involve allocation of superannuation contributions for around 8m employees with another 9 million employees having contributions lodged quarterly. This amount of transactions creates constant complicated administration.
There are a myriad of letters being sent to employers and members around contributions and employment details. Accounting processes are complicated and some 3 million people change jobs every year creating another mountain of paperwork for the funds. There are at least 480 million actions taken by fund managers through a year. At an average cost of $3 (it must be more than that!) this amounts to well over $1.2 billion. Given the funds will have some costs in dealing with the ATO and the ATO will take around 1% for their own costs this sees a saving of almost $1 billion, money that goes straight into the members accounts.
There is no doubt that the red tape reduction for employers will also be considerable. The saving in time and worry for many smaller businesses will be substantial.
The removal of employers from the collection process creates one big change within the superannuation industry. The fund owners, the individuals, will no longer be referred to as employees or members, they will be known as investors because that is what they are. The funds will no longer have a third party collecting their money as the employers will no longer be involved. There will be no need for fund managers to be named in industrial awards or processes.
The funds will have to compete, like any other business, for the attention of new investors/members. Their marketing activity will not be forced onto employers. The funds will have to develop new products that will attract investors, they will need to communicate in a way that the average person will understand. The funds will need to become part of the Australian financial sector competing for funds and changing their products and processes as needed, developing new and efficient ways of collecting and distributing funds. Under this proposal the fund managers that are poorly managed will either have to get their act together or be swallowed up by other more efficient funds. There is no doubt that new funds would emerge offering just what people want. This would change the nature of communications from fund managers.
This approach would also, for the first time, connect the owners of the funds to the management of the funds. At every tax return time the tax payer would see exactly how much money they have contributed to their retirement. They then may seek funds that have high returns, or more secure investments or have a choice of ethical or environmental investments. They may seek funds that support infrastructure development in Australia, or in their local area (and as always APRA would as always be watching very closely to make sure the system does not attract dodgy investments).
This would bring industry fund managers, in particular, into the real world of business where they have to compete for peoples’ money by offering good products. At the moment the industry funds undertake next to no activity in accessing funds as employers do that for them at what is no perceived cost to the fund.
This change in collection also gives governments more flexibility to compensate tax payers who have been out of the superannuation system due to the lack of a job. Any increase in the superannuation guarantee would be managed through the tax system.
The tax system can be used, as it always has been, to gather funds needed to run the country and make society fairer for all people.
There are many other benefits of including superannuation with PAYG.
Taxpayers outside the tax system are more likely to be re-engaged as the ATO will need information to be able to forward payments to their fund of choice. The need to engage with the ATO would be more compelling for these people as 9%+ of earnings would normally be a substantial amount of unclaimed funds.
The fund managers and employers would have the capacity to better plan and manage cash flow.
Employees would be aware of the full income they are receiving from their employers as their gross wages would now include the super component.
In the case of bankruptcies and business failure the ATO normally has first call on any ‘money due’ and the demands of employees have a much lower priority. In this proposal the super guarantee component would have the same priority as the ATO, giving some surety in super payments.
There will be no losses or change for members/investors. The only difference would be the need to provide information on fund managers to the ATO rather than to each employer. Fund manager management activities would become more streamlined and less complicated.
There are no extra costs for employers, only savings and an ability to concentrate on business issues rather than the financial affairs of its employees.
As a result productivity would increase, jobs would be more secure and workplaces would be safer. The employer can concentrate on making the business profitable and spend the time previously spent on superannuation administration on monitoring safety and health issues in the workplace.
Employees would know exactly how much they earn and where that money is going. They would know that the employer is no longer involved and does not need to be monitored.
This proposal takes superannuation out of the industrial system, where financial services and investments do not belong, and places it in the taxation system where it does belong.
The Superannuation Clearing House
This proposal is a better option than a superannuation clearing house for small businesses (and the clearing house is a much better option than dealing directly with the funds). Any clearing house would still involve employers in the process. In whatever form a clearing house takes, employers will still need to keep records, make payments and deal with some person on super issues. Even with the clearing house there is no doubt the fund managers would continue to harass and scam employers through incompetence and just the size of the task. This proposal removes employers from the process altogether.
Why are employers in the superannuation system with no return for effort?
This proposal has come about from one of our members asking the question “Why are we involved in superannuation collection and advice on investments for our employees?” That is indeed a good question. Businesses, small business in particular, have enough to do with normal day to day activities without this unpaid work.
Fund managers are multi-billion dollar businesses and they distribute profits in the form of investment returns and share dividends as well as paying high salaries and bonuses to a large number of senior staff, trustees and directors. Employers receive no fee for their activities. Acting as a collection agent for PAYG and BAS is one thing, but to also collect money, at no charge, for large private sector financial institutions seems to be unfair and certainly not in the spirit of the financial services industry. The banks and financial institutions are quite happy charging for services yet under the super guarantee small business is expected to act as collection agents for the fund managers, without compensation.
Our proposal takes employers out of the superannuation equation and adds some sense and simplicity to the process.
Fund managers object to this proposal
From our understanding the reason this proposal has not been accepted so far (although it is a policy promise of Tony Abbott and the opposition) is that the fund managers, particularly the Industry Funds, have lobbied hard to keep employers in the process as they do not wish to be too close to the tax office. This creates a question as to why? Why would they reject a process that saves them $10 billion?