Outsourcing payroll means gaining an expert on your team
In this ever changing compliance landscape, it is becoming increasingly difficult for businesses to manage their compliance obligations and focus on their core business.
Apart from ‘obvious’ compliance such as income tax returns, business activity statements and financial reports, there are so many intricacies to compliance that many businesses find themselves at risk of non-compliance purely because they ‘don’t know what they do not know.’ And why should they? It’s not bad business practices it’s just that this expertise isn’t their core business.
Hiring and maintaining staff for example, may seem simple and straightforward. However, there are so many tax and compliance requirements that you inherit as an employer.
Outsourcing has a number of benefits. But most significantly, outsourcing is using the expertise of specialists to manage the payroll process. This reduces the risk of error, inadvertent non-compliance and demonstrates to any regulatory body that may audit you that you have taken reasonable steps to be compliant (which generally puts you in good stead for negotiating around penalties and interest for any historical/legacy errors you may have
Five ‘headaches’ that you can potentially avoid by outsourcing your workforce management.
- Falling foul of the NES or using the wrong Award (and I don’t mean Logie).
When hiring staff, consideration must be given to the appropriate award that the employee falls under. There are 122 industry and occupation awards in Australia; do you know which one applies to your various employees? Even where an employee is not covered by a specific award, the National Employment Standards (NES) still apply.
An example of how easily an employer can be non-compliant and the related costs of non-compliance, just look at the fact that it is that it is mandatory under the NES to issue The Fair Work Information Statement to all new employees hired from 1 January 2010 (regardless of industry or occupation).
Not issuing a copy of this Statement to an employee constitutes a contravention of the NES and it may result in penalties of up to $10,800 for an individual and $54,000 for a corporation. These penalties are significant for a seemingly minor oversight and thus emphasises why it is extremely important to be aware of your obligations as an employer.
The graph below illustrates the value of penalties (in millions) Fairwork has imposed over a three year period. This graph indicates that businesses continue to get it wrong and penalties imposed by Fairwork are increasing.
- There is more to bringing on a new starter than showing them where the tea room is
Onboarding a new employee is not as simple as getting them to sign a contract. Under legislation, you must provide any new employee a Superannuation standard choice form. This form allows the employee to nominate their preferred superannuation fund for their superannuation guarantee contributions to be paid into.
Not only do you need to allow the employee choice, but prior to issuing the employee with the choice form, you need to have nominated your default superannuation fund. This allows the employee the opportunity to use the default where they do not have a preference.
With the introduction of SuperStream, the choice form now also collects all information required to ensure the superannuation fund selected is able to receive payments via SuperStream. Have you made this change to your starter pack?
Another key onboarding requirement is the Tax File Number (TFN) Declaration form. This form is required to enable the employee the opportunity to disclose their TFN, personal details, whether they are claiming the tax-free threshold, whether they have a HECS/HELP supplement debt and other offsets that they may be eligible for.
The details on this declaration are used to determine the amount of tax to be withheld from payments made by the employer to the employee.
Did you know that where the employee does not complete the form and return it to the employer within 28 days of commencing employment, the employer has to withhold at the top marginal rate of tax?
- PAYG: when it’s not standard, boy is it not standard…
PAYG withholding seems straight forward and most employers are aware of the weekly, fortnightly and monthly withholding tables that are published by the ATO.
However, there are certain payments to employees that are taxed differently, for example termination payments and lump sums of unused annual leave paid out to an employee.
There are various rules and conditions, depending on the type of termination, the age of the employee and other income that they have earned for the year; that will influence the amount of tax that needs to be withheld.
It can be extremely confusing to calculate withholding when the transaction involved is not the standard payment of salaries and wages.
Typical errors seen are including lump sum payments on termination as part of the ETP, applying the wrong cap to the type of termination and classifying an ETP as a genuine redundancy when it doesn’t meet the ATO criteria for doing so.
There is an entire ruling on the conditions that must be satisfied for a termination to be classified as a genuine redundancy and thus be entitled to the concessional treatment (TR 2009/2) and is an issue fought in tax law cases regularly. It is not as simple as stating that the employee is ‘redundant.’
- Superannuation it’s easy right? Just 9.5% on the salary… wrong!
Superannuation guarantee (SG) is a mandatory superannuation contribution that employers must make on behalf of their employees.
Currently, the SG rate is 9.5%. But what is 9.5% taken from? It is taken from what is termed as ‘ordinary times earnings’ or OTE.
Determining an employee’s OTE can be extremely difficult, especially where employees are paid a number of different wage types such as allowances, overtime, bonuses and commissions.
SGR 2009/2 which is the primary ATO guidance on determining what constitutes OTE is over 30 pages long, which indicates just how complicated it can be!
Of all the obligations that stem from payroll, SG carries the most significant penalties. Unlike other non-compliance penalties, Superannuation Guarantee Charge (SGC) comprises of multiple components that cannot be considered in isolation and there is very little scope for the Commissioner to exercise their discretion to remit penalties, even if it is a one-off, inadvertent mistake.
The ATO will investigate every SG complaint made by employees and the table below demonstrates, over a three year period, the actions taken by the ATO as an outcome of employee complaints. The table shows of the SGC raised, over half of it is raised through a default assessment from the ATO (meaning they caught on first) and the remainder are raised through voluntary disclosures from the employers.
A promising trend however is that over the three year period, there seems to be less in the way of total SGC collected and a decrease in ATO default assessments and more in voluntary disclosures which means that employers are obviously more aware, making less mistakes and owning up to their mistakes.
|SGC raised ($m)||%||%||%|
|Default Assessment raised||102||58.1||159.9||68.6||187.7||82.2|
|Outcome – Cases|
|Default Assessment raised||6,170||31.2||4,754||29||4,814||44.2|
|SGC Statement Lodged||4,665||23.6||3,770||23||2,084||19.1|
Source: Inspector-General of Taxation Review into the ATO’s administration of Superannuation Guarantee Charge.
- Offering other disbursements to your staff seems too hard. But it may help you attract the right people.
There are so many other disbursements that commonly come out of an employee’s payroll, they include:
- Salary sacrificed amounts (i.e. novated leases)
- Child support payments
- Union fees/Social club fees
- Health insurance
- Gym memberships
Offering staff some basic incentives such as the above may go some way in increasing staff motivation and job satisfaction and hopefully lead to better staff retention. According to a Forbes study; ‘companies that scored in the top 20% for building a “recognition-rich culture” actually had 31% lower voluntary turnover rates.’
Some of these benefits may be subject to Fringe Benefits Tax (FBT) and therefore consultation with your accountant would be best. Policies and procedures should be in place around the administration of any such benefits, salary sacrifice facilities and whether employees are liable to make an ‘employee contribution’ to counteract any FBT liability to you (the employer).
Written by: Angela Lehmann