What is payday super and why is Australia introducing it?

A little compound interest can make a big difference to super balances. That’s why the government announced last year that employers would be required to pay employees their super on their payday.

Many employers, particularly large organisations, already pay their employees their super when they are paid their wages or salary.

Under the proposal, which has not yet been legislated, all employers will be required to do so when payday super comes into effect, currently proposed from 1 July 2026.

This will boost retirement savings from employer contributions earlier and more frequently.

However, employers are also bracing for an increased administrative burden ahead of more detail on how the proposal will work.

The government is due to consider details of the proposal in the 2024-25 Budget on 14 May 2024.

In the meantime, here’s what we know so far.

As the name suggests, payday super is simply a requirement for employers to pay their employees’ Super Guarantee (SG) entitlements when they make salary and wage payments.

Employees must be paid at least monthly, or according to the requirements of their award or work agreement, according to the Fair Work Ombudsman.

SG entitlements are calculated as 11 per cent of ordinary time earnings (OTE) and must be paid at least quarterly. Payday super is expected to bring super payments into line with employees’ regular pay.

SG payments will rise to 11.5 per cent on 1 July 2024 and will increase again to 12 per cent on 1 July 2025.

The government proposed the introduction of payday super in the 2023-24 Federal Budget to help boost the retirement income of Australians. The measure is expected to:

• increase super savings
• reduce the risk of unpaid super debts if a company becomes bankrupt
• make it harder for any unscrupulous employers to avoid paying super.

The overwhelming majority of employers pay employees their full SG entitlements.

However, according to the Australian Taxation Office (ATO), billions of dollars are lost to employees every year in unpaid and underpaid super. In 2019-20, the net SG gap after ATO compliance activities was $3.4 billion.

The non-payment and underpayment of SG contributions can be harmful to employers as well as employees. The government released a consultation paper last year stating it is a cause of:

• delayed retirement
• reduced retirement savings due to the loss of compounding returns on their unpaid super
• a loss of insurance for some employees
• an unlevel playing field for employers who comply with the rules and pay SG promptly.

Payday super is expected to be of particular benefit to those in lower paid and casual work, who are more likely to miss out when super is paid less frequently. This includes women, who are overrepresented in this group.

Employees in industries including retail, hospitality and construction, and others that have large casual workforces are also likely to benefit.

Approximately 8.9 million Australians will end up with higher retirement savings from receiving their SG contributions earlier, according to the government.

In making the announcement, the government said a 25-year-old earning median wages currently receiving super quarterly and wages fortnightly would be $6,000 or 1.5 per cent better off at retirement due to increased compound interest on more frequent super payments.

The ATO initiated a consultation period with industry on the proposed introduction of payday super that ran until November 2023 and attracted submissions from more than 95 employer, industry and super groups.

The changes are expected disproportionately to affect micro- and small-to-medium enterprises, who are more likely to pay SG entitlements quarterly.

Super funds are broadly concerned over how the ATO will communicate the detail of the way payday super will work.

During the consultation process, employers expressed concerns over the increased administrative burden for those who will need to pay super more frequently, including issues such as:

• accuracy and timeliness of data provided by employees and new starters
• increased data handling associated with more frequent SG payments
• being allowed sufficient time to implement payday super
• being allowed sufficient time to respond and to correct administrative errors
• managing capital and ongoing costs
• minimising costs for end users.

The government is expected to consider the details of how payday super will work in May 2024.

This is expected to include things like the definition of “payday” – or how soon employers must pay SG contributions after wages and salary payments are made – and compliance mechanisms.

The final proposal is currently due to be considered as part of the 2024-25 Federal Budget and would be legislated after that time.

We will bring you more information after the Budget is handed down on 14 May 2024.