Chapter 6

Calculating the Real Cost of Employment

In This Chapter

arrow Understanding the cost of paying leave entitlements

arrow Working with workers compensation insurance and payroll tax

arrow Factoring in fringe benefits tax

arrow Making sure you remember superannuation

arrow Getting a little help with the employment costs ready reckoner

I mmediate costs, contingent liabilities, taxes, levies and superannuation charges are involved whenever you employ staff. These costs are in addition to wages, are real, and should be understood from the perspective of your business balance sheet. You can’t change them, but must work out how to manage them.

In this chapter, I explain where the cost of employment happens and how it impacts on the way you administer your business and manage the people within it. I cover how paid and unpaid leave affects the cost of employment and how you can manage those costs. I list the taxes, levies, fees and charges that governments like to impose on employers whenever a person is employed and provide some insight into the traps befalling unsuspecting small business employers who don’t read the fine print, especially on fringe benefits.

I also look at the system of mandatory superannuation savings that you must contribute on behalf of your employees, covering the frequency of payments and the choice of superannuation funds in the latter part of the chapter.

To make your life a whole lot easier, I also provide a simple ‘Ready Reckoner’ at the end of this chapter to help you calculate the cost of employing a person.

So Much Leave, They May Never Be At Work

To some employers, their staff are entitled to so much leave it feels like they’re never at work (although their staff may feel the opposite). In Chapter 4 I cover the amount of paid and unpaid leave employees are actually entitled to access under the National Employment Standards. In the following sections, I outline the direct costs of paying that leave and the hidden costs in administrating the leave.

Parental leave

Two separate entitlements arise from the birth or adoption of a child to an employee, as follows:

  • 12 months of unpaid leave in relation to the birth of a child of the employee or their spouse, or the placement of a child with the employee for adoption, as long as the employee has responsibility for care of the child.
  • Paid Parental Leave (PPL) of 18 weeks and Paid Dad and Partner Leave (PDPL) of 8 weeks provided by the Australian Government (equivalent to the national minimum wage). This is a benefit under a different law from the NES. Note: At the time of writing, the Australian Government plans to increase paid parental leave to 6 months on full wage plus superannuation.

The entitlement to take parental leave in both of the preceding cases occurs concurrently. Although PPL and PDPL is funded by the Australian Government, the leave nevertheless imposes administrative costs on you because you’re required to pay the benefit to the eligible person through your business payroll. The payment to you for your time is nil, zero, zip, nothing. On the upside, at least you’re not obliged to pay the employee until you’ve actually received the funds from the Australian Government.

tip_4c.eps Employer obligations to administer the PPL and PDPL are more generally described on the Department of Human Services website (check out www.humanservices.gov.au). Visit the website for more information and contact the government agency responsible if you have further questions (your taxes pay for it, so you may as well get your money’s worth!).

Unless you offer employees paid leave when they or their partners give birth or adopt a child, parental leave doesn’t create any direct costs to your business. As long as employees provide the required notice of when they intend to commence leave, the only immediate cost to you is in the recruitment and payment of employees to replace them while they’re away on leave.

The most obvious hidden cost is in administration for the entire period of the PPL. Of course quantifying that cost is hard. Further, if you use a bookkeeping service, the provider should be capable of adjusting your payroll accounts to ensure the payments are completed in the manner required by law.

tip_4c.eps If you administer your business’s payroll yourself, you also have to correctly administer any required parental leave payments. Get on the internet and download the Australian Government’s Paid Parental Leave scheme Employer Toolkit — available at www.humanservices.gov.au/business/publications/fpr081.

Another, less obvious, hidden cost of parental leave is the loss of productivity that can occur while attempting to train the replacement employee. A simple way to minimise the cost from the loss of productivity is to have the replacement employee commence work before the leave commences, so a handover of the work can occur. Clearly, you incur the cost of paying two people for the one job during the handover but that cost needs to be weighed against the loss of productivity and potential disruption to the business that might occur were no handover to occur. Besides, you will have to do the handover if the employee has already departed.

Annual leave

Full- and part-time employees are entitled to four weeks annual leave per year and regular shift workers are entitled to five weeks leave. This entitlement is cumulative and represents a liability of approximately 7.7 and 9.6 per cent of salary respectively.

Annual leave accrues progressively during a year of service according to the employee’s ordinary hours of work. For example, if employees work 38 hours in a week, they accrue 2.91 hours annual leave in that week.

Annual leave is designed to provide employees with a paid rest from work. Therefore, the primary method to manage the liability is to ensure leave is taken every year.

The NES states that leave may be taken at times agreed between the employer and the employee, and employers must not unreasonably refuse a request to take annual leave. However, you do have options to schedule leave with the employee at times that are suitable to your small business — refer to Chapter 4 for more details.

Sometimes, employees would rather be paid their annual leave and continue working, known as cashing out. Chapter 4 also covers the provisions that apply to cashing out annual leave, but keep in mind that, if you are allowed to pay out your employees’ annual leave, you must pay at least the full amount of money they would have been paid if they had taken the leave. Discounting is not allowed.

tip_4c.eps If employees haven’t taken or cashed out their entitlement to annual leave, it must be paid out when they resign or the employment otherwise terminates. Making provision for annual leave in your bank accounts, and not just on the balance sheet, is always useful because these payments represent real money and a real cost to the business.

Personal/carer’s and compassionate leave

Although personal/carer’s and compassionate leave entitlements are contingent on the employee satisfying the eligibility criteria (refer to Chapter 4 for more), you have an obligation to accrue the leave progressively according to the employee’s ordinary hours of work. For example, if an employee works 38 hours in a week, they accrue 1.457 hours paid personal/carer’s leave in that week. This entitlement is cumulative and represents a liability of approximately 3.8 per cent of salary.

Cashing out personal/carer’s leave

You and your employee may agree to cash out some of the accrued paid personal/carer’s leave if the employee is covered by a modern award or enterprise agreement that allows cashing out and as long as the employee maintains a balance of at least 15 days paid leave after cashing out the leave. Employees must be paid at least the full amount of money they would have been paid if they had taken the leave.

warning_4c.eps Several problems arise with cashing out leave as a strategy to manage the liability and reduce costs. Firstly, no modern award currently allows cashing out. So you’d need to negotiate an enterprise agreement just to allow cashing out of personal/carer’s leave. Secondly, the liability to pay personal/carer’s leave is contingent on the employee actually being unfit for work or having to care for ill or injured immediate family members. Thirdly, the accrued liability isn’t paid out on termination of employment. So why pay out an entitlement that might never be accessed? Besides, the employees may still become ill and unable to attend work.

Back-filling employees on personal/carer’s leave

The common term used when employing staff to cover a vacancy due to an employee’s absence on personal/carer’s leave is to back-fill the position. Back-filling means paying double wages (one for the employee on leave and one for the replacement employee) and so is a significant cost to the business.

The most common strategy to avoid the double wages back-fill is for you or your family members to perform the job while the employee is on leave. (Assuming you can convince a family member to do you a favour and work for nothing.) While this strategy avoids the cost of another wage you should ask yourself the question: Is this really the best use of your time? In some cases, paying someone else to do the back-fill so you can focus on other things is worthwhile. The following section looks at some other options.

Planning for emergencies relating to personal/carer’s leave

Depending upon the nature of your small business, a cost-effective strategy to respond to staff absences on personal/carer’s leave is to reorganise the work to be performed when they return from leave — so anything non-urgent is put on hold. However, in many small businesses that’s not possible — for example, in retail, hospitality and professional small businesses that rely on a daily schedule of customers or clients. Therefore, you need a plan to ensure the work is performed when staff are unexpectedly absent due to personal or family illness.

tip_4c.eps Plan 9 from Outer Space was a movie released in 1959 and voted the worst movie ever made. Produced and directed by the infamous Ed Wood Jr, the plot involved aliens invading Earth and raising the dead to take over the world. I don’t know what happened to the alien’s Plan 1 through 8, but Plan 9 wasn’t particularly successful. Unlike the aliens in that movie you should develop a simple contingency plan to ensure the work necessary to keep your business operating successfully continues during emergencies.

Here’s how to develop a contingency plan for covering staff personal leave:

  1. Identify the hazard.

    In this case, the hazard is illness and injuries that prevent staff from attending work, such as the yearly colds and flu epidemics.

  2. Rate the consequences for the business when staff are absent due to illness or injury.

    For example, would it be insignificant, minor, major, or catastrophic? You can rate each member of staff individually.

  3. Assess the likelihood of the risk of staff absences due to illness or injury.

    Would it be rare, unlikely, moderately likely, likely or almost certain?

  4. Put the ratings from Steps 2 and 3 together and score the overall risk.

    This could be low, moderate, significant or high.

  5. Tailor your contingency action plan commensurate to the level of the risk.

Note: The strategy outlined in the preceding steps is similar to risk analysis for workplace health and safety — see Chapter 14 for more.

tip_4c.eps Your contingency action plan for covering leave should include different responses to the different contingencies that you have identified in the risk analysis. For example, you can address the risk of financial ruin to your business by investing in back-up or fully automated systems that can continue during absences of key staff. The cost of covering other absences may be addressed through spreading or rearranging work among available staff who have the skills and knowledge to perform them. Importantly, have a plan in place for the inevitable absence of staff on personal/carer’s leave.

See the sidebar ‘Working out a contingency plan for covering leave’ for an example of how this action plan might work.

Compassionate leave

Chapter 4 covers compassionate leave entitlements. You can’t plan for this type of leave and your employees can’t fake it. When a family member or member of their household dies or is seriously ill, you must allow them to take the entitled paid leave and bear the cost.

Community service leave

Generally community service leave is unpaid, meaning the cost to you is your time when covering the work while the employee is absent or, in the case of a replacement employee, the wages.

Jury service is an exception to the general rule — an employer must pay a full-time or part-time employee absent on jury service their ordinary rate of pay for a maximum of ten days absence. Casual employees are not entitled to payment.

Refer to Chapter 4 for a full explanation of the entitlement and management of community service leave.

Long service leave

The cost of long service leave to your small business varies depending upon where your small business operates. The NES doesn’t expressly provide a national standard of long service leave, but covers this type of leave indirectly — that is, employees are entitled to long service leave in accordance with the terms of applicable pre-modern awards, agreements or state legislation.

Chapter 4 provides a summary of long service leave entitlements. In this section, I cover calculating the cost of long service and what you should do to ensure that you’re able to meet the obligation when the employee becomes entitled to the leave.

Making provision for long service leave

Generally, employees are entitled to long service leave of two months duration on their ordinary rate of pay after 10 years of continuous service. South Australia and the Northern Territory are more generous, with the entitlement being three months long service leave after 10 years continuous service, paid at employees’ ordinary rate of pay. Additional long service leave accrues normally in five-year blocks, at the same rate as it does for the first 10 years.

Table 6-1 outlines by state or territory what elements of remuneration are considered part of employee’s ordinary rate of pay.

Notwithstanding that employees are entitled to take leave after ten years, they are entitled to payment for the leave if their employment terminates before ten years. (The entitlement to payment on termination is not automatic — refer to Chapter 4 for more details.)

remember_4c.eps Whatever the entitlement to payment on termination is, understanding the cost to your business, and when that cost kicks in, is important because you need to make provision for it.

Long service leave represents 1.67 per cent of ordinary pay salary for each year of continuous service in all states and territories except South Australia and the Northern Territory, where it represents 2.5 per cent of ordinary pay salary for each year of continuous service. (Note: The Australian building and construction industry is the exception to long service leave rules in both entitlements and how they administered — see the section, ‘Building and construction industry exception’, later in this chapter, for more details.)

tip_4c.eps You don’t have to make provisions for long service leave from the first day of employment. Once staff have been employed by you for a substantial period and are likely to qualify for long service, you can begin to make provisions in the accounts (and, more importantly, the bank) for payments that will occur in the future.

remember_4c.eps The long service leave provisions you need to make depend on the state or territory your small business is based in. For example, in NSW you don’t need to set aside money for an employee’s long service during the first 2.5 years of their employment. During the next 2.5 years of employment, you need to put aside 1.7334 weeks pay each year to cover the amount of leave they may be entitled to if they were to leave after five years of employment. Over the next five years, you need to put aside 0.8667 weeks pay per year to cover the amount of leave that they will be able to take after 10 years continuous service.

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Table 6-2 outlines the provisions that you should make towards your long service leave liabilities, depending on the state or territory your business is based in.

Table 6-2 Required Long Service Leave Provisions by State and Territory

For Each Completed Full:

State/Territory & Period of Service

Year of Service

Month of Service

Week of Service

NEW SOUTH WALES

0–2.5 years

Nil

Nil

Nil

2.5–5 years

1.7334

0.1444

0.0334

5 years +

0.8667

0.0722

0.0167

VICTORIA

0–3.5 years

Nil

Nil

Nil

3.5–7 years

1.7334

0.1444

0.3334

7 years +

0.8667

0.0722

0.0167

QUEENSLAND

0–3.5 years

Nil

Nil

Nil

3.5–7 years

1.7334

0.1444

0.0334

7 years +

0.8667

0.0722

0.0167

WESTERN AUSTRALIA

0–3.5 years

Nil

Nil

Nil

3.5–7 years

1.7334

0.1444

0.0334

7 years +

0.8667

0.0722

0.0167

SOUTH AUSTRALIA

0–3.5 years

Nil

Nil

Nil

3.5–7 years

2.6

0.2166

0.0500

7 years +

1.3

0.1083

0.0250

TASMANIA

0–3.5 years

Nil

Nil

Nil

3.5–7 years

1.7334

0.1444

0.0334

7 years +

0.8667

0.0722

0.0167

NORTHERN TERRITORY

0–3.5 years

Nil

Nil

Nil

3.5–7 years

2.6

0.2166

0.0500

7 years +

1.3

0.1083

0.02500

ACT

0–2.5 years

Nil

Nil

Nil

2.5–5 years

1.7334

0.1444

0.0334

5 years +

0.8667

0.0722

0.0167

Cashing out long service leave

Many state laws prohibit the cashing out of long service leave for the obvious reason that it’s designed as a paid break from work, not a bonus payment for long service. However, some exceptions to the rule exist in Queensland, Western Australia, South Australia and Tasmania. These exceptions provide a little more flexibility to manage the cost of long service leave, especially where the employee is vital to the business and would prefer to be paid rather than take the leave. Refer to Chapter 4 for more on long service leave.

Building and construction industry exception

The Australian building and construction industry is an exception to the rule of human resource management and regulation in many ways. The entitlement to long service leave and its administration is a case in point.

remember_4c.eps Building and construction employers are businesses that employ construction workers on sites, engaged in construction, erection, installation, reconstruction, re-erection, renovation, alteration, demolition or (in some limited cases) maintenance or repairs.

If your small business operates in the building and construction industry — whether as a self-employed tradesperson or sub-contractor to the industry — the following arrangements apply to your employees:

  • Long service leave accrues for employees working in the building and construction industry throughout Australia based on their continuous service in the industry. Service is not tied to one employer.
  • The entitlement to long service may vary and isn’t necessarily the same as that for other employees in the state in which the work occurs. For example, in Victoria it is more generous than the state’s general entitlement (three months after 10 years of service instead of two months).
  • Employers contribute to a fund established under complementary state laws for eligible employees based on either their hours of work each month or payment of a levy tied to the cost of the construction work.
  • Agencies in each state collect the levy or fee set by regulation that funds the entitlement to long service leave of employees.

As an employer you need to register with the applicable fund and make contributions in accordance with the rules of that fund. The agency will pay employees when they’re eligible for long service. You don’t have to make provision in your accounts.

Agencies administering the portable long service scheme for the Australian building and construction industry can be located through the following websites:

Workers Compensation Insurance and Payroll Tax

Taxes, levies and charges on employment are the stone in the shoe of small business. Why they’re imposed is beyond the scope of this book. (My advice is always try to change the things that you can control and accept the things that you can’t control.) Understanding how taxes, levies and charges work, and when they apply, empowers you to organise your employment arrangements in a manner to minimise the cost.

Workers compensation

The Australian Bureau of Statistics estimates that 640,700 workers suffered a work-related injury or illness in 2009. Safe Work Australia reckons around 135,000 claims are accepted each year involving one week or more off work, a permanent incapacity or fatality.

All small-business employers must have workers compensation insurance. Each and every claim for compensation means someone has to pay for the injury. Premiums charged by your nominated workers compensation insurer are the result of these claims. Your challenge is to minimise the cost to your business of the premiums charged. As a small business, your influence may be minor but you may be able control premiums to a minor extent if you know how they’re established.

Factors influencing your premium

The factors affecting your workers compensation insurance premiums may vary depending upon which state your business is operating from within. However, in general the following factors are taken into account to establish the insurance premium:

  • Remuneration, including wages, salaries, superannuation and other benefits you pay to your workers
  • Your industry classification and rate (these reflect the claims experience of the industry in which you operate)
  • The average premiums for your industry (if you have a remuneration of $200,000 or less)

If your remuneration is over $200,000, your workers compensation insurance premium is calculated using:

  • The average rate of your industry
  • Your claims experience — if you perform better than your industry average, you pay less; if you perform worse, you pay more
  • The size of your business, measured using your remuneration and industry rate

Your workers compensation insurance premium is subject to 10 per cent GST, which is added after the premium is calculated.

Paying the first two weeks of a claim

Normally, you’re responsible for the first ten days of benefits paid to an injured employee who is off work and the first payment of medical expenses (up to a maximum payment indexed annually). You can remove the responsibility of paying this excess by taking up a buy-out option, which increases your insurance premium — for example, in Victoria this option adds 10 per cent to your workers compensation insurance premium.

Payroll tax

The Australian Government describes the nature and purpose of Payroll tax succinctly on its business.gov.au website as follows:

Payroll tax is a state tax on the wages you pay to employees. It’s calculated on the amount of wages you pay per month. You need to pay payroll tax if your total Australian wages exceed the exemption threshold in your state or territory — this varies between states.

Don’t you just love it when one level of government (that doesn’t collect the tax) describes other levels of government taxes with such brutal honesty?

Each Australian state operates its own scheme of arrangements for registration and payment of payroll tax. Rebates are offered from time to time to special categories including small business. So the calculation of the cost of payroll tax can be problematic.

Table 6-3 provides a summary of the payroll tax and the exemption thresholds applicable in the financial year 2013–14 by state or territory.

Table 6-3 Payroll Tax and Thresholds for 2013–14

State

Tax

Exemption Threshold

NSW

5.45%

    $750,000

VIC

4.9%

    $550,000

QLD

4.75%

  $1,100,000

WA

5.5%

    $750,000

SA

4.95%

    $600,000

TAS

6.1%

  $1,250,000

NT

5.5%

  $1,500,000

ACT

6.85%

  $1,750,000

Paying Fringe Benefits Tax

Have you handed out gifts to your staff lately? Maybe you paid for a holiday to a resort in Queensland. How about free meals or discounts on goods and services that you sell to the public? If you provide any of these types of benefits to staff (or other benefits), you may be liable to pay fringe benefits tax (FBT).

Explaining every aspect of the Australian fringe benefits tax system is beyond the scope of this book. However, in the following sections I can point out a few of the fundamentals and illustrate the cost to you from the tax.

Defining fringe benefits

A fringe benefit includes any rights, privileges or services provided by you to employees. These may include

  • Allowing staff to use a work car for private purposes
  • Giving a financial loan at less than the market rate
  • Providing access to entertainment activities at no cost — for example, access to restaurant dining, movies, theatre and sporting events
  • Reimbursing non-business related expenses incurred by employees, such as school fees, home loan mortgage repayments, weekly grocery shopping accounts or private health insurance

Fringe benefits are usually provided either as part of an agreed salary sacrifice arrangement with employees, or ad hoc to suit the often personal and informal rewards offered to employees for the valuable contribution that they make to the business.

The following are not fringe benefits and so not subject to FBT:

  • Contributions you make to a first home saver account (FHSA) for an employee
  • Employment termination payments
  • Exempt benefits such as:
    • Work-related expense items such as mobile phones, laptop computers, tools, protective clothing and footwear
    • Car parking benefit if the total gross income of your small business for the financial year immediately before the relevant FBT year was less than $10 million and the benefit isn’t provided in a commercial car park
    • Taxi travel if provided to travel home from work on a single journey due to illness or late night work
    • Benefits of less than $300 in value that are provided infrequently or where calculating a value is difficult because of the minor benefit to the employee
  • Payments made by partnerships and sole traders to relatives and other associates that are deemed not to be assessable income
  • Reimbursements you make to an employee for their personal FHSA contribution
  • Salary or wages
  • Share dividends
  • Shares acquired under approved employee share schemes
  • Superannuation contributions made by you for employees

Car fringe benefits

Private use of business-owned vehicles is a fringe benefit. If you allow your staff to drive the business car home from work each night, that trip is a taxable fringe benefit. You can calculate the taxable value of a car fringe benefit using either the statutory method or the operating cost method:

  • Statutory formula method: The old progressive statutory rates have been replaced with a single statutory rate of 20 per cent, which applies regardless of the distance travelled. The taxable value of the car fringe benefit is the statutory rate multiplied by the car’s base value (that is, the purchase price).
  • Operating cost method: The taxable value of the car fringe benefit is a percentage of the total costs of operating the car during the fringe benefits tax (FBT) year. The percentage varies with the extent of actual private use. The lower the incidence of actual private use, the lower the taxable value.

warning_4c.eps The previous Australian Government announced changes to the calculation methods for car fringe benefits, commencing on 1 April 2014. The change proposed removes the statutory formula method for calculating FBT on both salary-sacrificed and employer-provided cars and so calculations will rely exclusively on the operating cost method. The change, if implemented, will affect salary-sacrificed and employer-provided car fringe benefits for new contracts entered into after 16 July 2013, and all car fringe benefits for new leases entered after the 16 July 2013 and existing contracts materially varied after 16 July 2013. The proposed changes won’t affect existing exempt car benefit concessions that apply to certain uses of taxis, panel vans, utility vehicles and other non-car road vehicles (see Chapter 10 for more on the exempt car benefit concessions).

Unfortunately, using the operating cost method for calculating car fringe benefits means keeping detailed log book records of business and private travel over a three-month period.

Recording and reporting obligations

If you are providing fringe benefits, you must do the following:

  • Calculate how much FBT you have to pay
  • Keep FBT records including car travel log books
  • Register for FBT
  • Report fringe benefits on your employees’ payment summaries and your FBT return
  • Pay FBT to the Australian Tax Office

Calculating FBT

The FBT rate is 46.5 per cent of the grossed up value of the fringe benefits that you provide to employees, and paying this tax is your responsibility. In this section, I outline the Australian Tax Office’s recommended procedure for calculating your FBT liability.

warning_4c.eps Working out your FBT liability isn’t particularly easy. If at all unsure, ask your tax accountant or bookkeeper for help or to calculate it for you.

Here’s how to calculate your FBT liability:

  1. Determine what type of fringe benefits you provide.

    Examples could include allowing staff to use a work car for private purposes, providing access to entertainment activities at no cost or reimbursing non-business related expenses incurred by employees.

  2. Work out the taxable value of each fringe benefit you provide to each employee.

    The rules for calculating the taxable value of a fringe benefit vary according to the type of benefit — check the ATO website (www.ato.gov.au) and with your accountant if unsure.

  3. Work out the total taxable value of all the fringe benefits you provide for which you can claim a GST credit.

  4. Work out the total taxable value of all those benefits for which you can’t claim a GST credit

    For example, these benefits include supplies you made that were either GST-free or input-taxed.

  5. Work out the grossed-up taxable value of the benefits by multiplying the total taxable value of all the fringe benefits you can claim a GST credit for (from Step 3) by 2.0647.

    Grossing-up means increasing the taxable value of benefits you provide to reflect the gross salary employees would have to earn at the highest marginal tax rate (including Medicare levy) to buy the benefits after paying tax.

  6. Work out the grossed-up taxable value of the remaining benefits by multiplying the total taxable value of all the fringe benefits you can’t claim a GST credit for (from Step 4) by 1.8692.

  7. Add the grossed-up amounts from Steps 5 and 6.

    This is your total fringe benefits taxable amount.

  8. Multiply the total fringe benefits taxable amount (from Step 7) by the FBT rate (46.5 per cent).

    This gives you the total FBT amount you’re liable to pay.

Reducing your FBT liability

You can reduce your FBT liability in either of two ways.

  • Pass on the cost of FBT to the employee under a properly constructed salary sacrifice arrangement. This means the FBT on the agreed benefits that you provide to the employee in lieu of salary is absorbed in the amount of salary sacrificed. However, FBT is set at the equivalent of the highest PAYG marginal tax rate and, therefore, except in relation to FBT-exempt benefits and vehicles employees are unlikely to see a net tax benefit from the salary sacrifice arrangement under that arrangement.
  • Only provide FBT-exempt benefits to staff.

Refer to the section ‘Defining fringe benefits’ for examples of FBT-exempt benefits.

In Chapter 10, I discuss how you can construct a tax-effective salary sacrifice arrangement for your employees. For further information in relation to fringe benefits tax check out the ‘Fringe benefits for small business’ section of the Australian Tax Office website (www.ato.gov.au).

Don’t Forget Superannuation!

A major cost of employment is mandatory superannuation contributions to compliant superannuation funds on behalf of your employees. Commencing at 9 per cent of ordinary time earnings when introduced in the 1990s, the payments will progressively increase to 12 per cent by 1 July 2019. Understanding how much super, and when and where it must be paid are the fundamentals of superannuation for small business.

How much and how often?

As an employer, you have an obligation to pay super contributions on behalf of all your eligible employees. These contributions are in addition to your employees’ salaries and wages. This compulsory contribution is called the Superannuation Guarantee and it requires you to:

  • Pay super for your eligible employees
  • Contribute to the correct super funds
  • Pay contributions by the cut-off date each quarter

Table 6-4 shows the increases to the minimum super contributions you must pay on each eligible employee’s earnings base occurring over the next few years.

warning_4c.eps At the time of writing, the Australian government planned to delay the scheduled superannuation contribution increases for two years. This would mean the increase to 9.5 per cent would not occur until 1 July 2016, and the other increase would follow yearly from that date.

Table 6-4 Required Superannuation Guarantee Contributions to 2019

Year

Super Guarantee

1 July 2013

         9.25%

1 July 2014

         9.5%

1 July 2015

         10%

1 July 2016

         10.5%

1 July 2017

         11%

1 July 2018

         11.5%

1 July 2019

         12%

In relation to the super guarantee, your employees’ earnings base is their ordinary times earnings, which includes all earnings for ordinary hours of work and may include a wider range of employee payments than the wages provided under a modern award or individual contract. For example, ordinary time earnings includes

  • Allowances
  • Commissions
  • Over-award payments
  • Paid leave
  • Shift loadings

Also, various elements of remuneration aren’t included in ordinary time earnings for the purpose of superannuation guarantee contributions, as follows:

  • Fringe benefits
  • Overtime
  • Termination payments
  • Workers compensation payments

Exceptions and inclusions to the ordinary earnings rules

Some exceptions to the ordinary earnings rules exists, as well as some payments that you might think would be excluded but are included, as follows:

  • Annual leave payments: Unused annual leave payments on termination are specifically excluded from the definition of ordinary time earnings and so no superannuation is payable. However, superannuation is payable on annual leave taken while employed.
  • Expense allowance: An expense allowance paid with the expectation that it will be fully expended in producing income, such as a car allowance or travel and accommodation for sales staff, isn’t considered by the Australian Tax Office to be part of ordinary time earnings and so doesn’t attract superannuation.
  • Meal allowance: A meal allowance paid during a period of overtime isn’t considered ordinary time earnings.
  • Non-expense related allowances: Allowances paid other than a reimbursement of expenses or expense allowance are considered to be part of ordinary time earnings. For example, a site allowance isn’t paid as expense allowances and therefore superannuation is payable.
  • Overtime payments: Overtime payments are generally excluded, but in some circumstances they may be included. Employees required under a contract of employment to regularly work in excess of the standard 38 hours per week (in other words, overtime) may be entitled to superannuation on those hours. For example, an employee who is employed to regularly work 40 hours per week and paid a salary to cover all hours is entitled to superannuation on those additional two hours because they’re regular, normal or customary. On the other hand, if an employee is contracted to infrequent and unspecified ‘reasonable additional hours’ in excess of the standard 38 hour week, superannuation isn’t paid on those hours.
  • Payment in lieu of notice of termination of employment: Awards and agreements often provide that, instead of giving notice of termination, the employer may simply pay an amount equivalent to the ordinary time rate of salary or wages that the employee would have earned during the notice period — that is, payment in lieu of notice. Such payments are considered to be ordinary time earnings and, therefore, superannuation is paid in addition to the payment.
  • Redundancy pay: Redundancy pay isn’t considered a payment for the performance of work. It is compensation for the loss of employment and so doesn’t attract superannuation.
  • Unfair dismissal compensation: Payments in respect of unfair dismissal claims are to compensate an employee for the loss of employment and/or to settle a dispute in respect of the employment. Such payments don’t require superannuation contributions.
  • Workers compensation payment: Workers compensation payments, including top-up or make-up payments, are considered to be ordinary time earnings where some work is performed, but not if the employee does not perform any work.

Eligibility

Generally, you have to pay super for your employees if they

  • Are aged 18 years or over
  • Are paid $450 (before tax) or more in a calendar month
  • Work full-time, part-time or on a casual basis

An employee under the age of 18 who works at least 30 hours per week must receive superannuation. You may also have to pay super for any employees who are visiting Australia on an eligible temporary resident visa.

As of 1 July 2013, no upper age limit exists for paying super for an employee.

An employee is anyone who receives salary or wages in return for their labour or services. For super guarantee purposes, employees may also include

  • Contractors
  • Directors of the business
  • Family members of the employer who work in the business

Frequency of contributions

The superannuation contributions must be paid at least quarterly. The Australian Tax Office publishes the quarterly deadlines for payment into a compliant fund. If the quarterly cut-off date falls on a weekend or public holiday, you should make the payment by the next working day.

You can choose to make super payments more regularly than quarterly — for example, fortnightly or monthly — so long as the total amount you owe each quarter is paid by the quarterly cut-off dates.

Table 6-5 shows the superannuation contribution quarterly cut-off dates (current as at 28 February 2013).

Table 6-5 Superannuation Contribution Quarterly Cut-off Dates

Quarter

Dates

1

1 July–30 September

2

1 October–31 December

3

1 January–31 March

4

1 April–30 June

Payments must be made no later than 28 days after the end of each quarter. You can generally claim a tax deduction for super contributions you pay on time. However, if you pay late you can’t claim a tax deduction for the amount you pay.

Super choice: It’s an employee’s right

Under Superannuation Guarantee laws, employees are entitled to choose the superannuation fund they want their employer to contribute their mandatory payments into, unless an enterprise agreement is in place that prescribes a fund or funds into which all contributions must be made. If your small business has such an enterprise agreement in place, you must comply with the requirements of that agreement. For everyone else you are required to provide a choice to your employees — see the sidebar ‘Three steps to offering super choice’ for more on this.

Using a default fund

You need to start paying superannuation contributions to your employer-nominated default fund if

  • An employee doesn’t choose a fund within 28 days of starting employment with you
  • You haven’t accepted an employee’s choice of fund because he hasn’t yet provided all the information you need

Your employer-nominated fund must offer minimum life insurance for members.

tip_4c.eps Small businesses are eligible to use a service provided by the Australian Government that makes the superannuation guarantee payments on your behalf. The Small Business Superannuation Clearing House is a free online superannuation payments service that helps small businesses with 19 or fewer employees meet their superannuation guarantee obligations. For more information, go to www.humanservices.gov.au/business/services/medicare/small-business-superannuation-clearing-house.

Making Use of the Real Cost Ready Reckoner

A simple way to calculate the real cost of employing staff is to identify each of the elements (such as wages, allowances, fringe benefits and on-costs) as a percentage of the salary or wage, and so calculate the amount of money in dollars that each element represents for each employee. Then add up these elements to obtain the Total Employment Cost (TEC).

Spreadsheets are the friend of every small business owner so in this section I outline how to create a spreadsheet ready reckoner that helps you calculate the real cost of employment of staff in your small business. The spreadsheet is simple to set up, enabling you to easily see the real cost of employing staff.

Follow these steps to create your spreadsheet:

  1. Identify the correct modern award applicable to the employee (if one applies).
  2. Identify the appropriate wage classification, allowances, penalties and loadings.

  3. Set up a spreadsheet with two or more pages.

    The first page should include the formulae and percentages to calculate the TEC as per the example shown in Figure 6-1.

    Figure 6-1 shows a sample spreadsheet, using the example of a part-time food and beverage attendant employed in a small catering business.

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    Screenshot reprinted by permission from Microsoft Corporation.

    Figure 6-1: Sample total employment cost calculator spreadsheet.

  4. When the rates change each year, update these pages of the spreadsheet.

    Your formula on the main page should remain unchanged and, therefore, when the data on the modern award wages, allowances and penalties pages change, the results will automatically be updated.

On the second and subsequent pages of your spreadsheet enter the applicable modern award data of wages, allowances, penalties and any other payments, and mark it accordingly.

checkitout_4c.eps Go to www.dummies.com/go/hrsmallbusinessau to access the sample spreadsheet shown in Figure 6-1 and get more of a feel for the formulae used.