In case you have recently been living under rock, or maybe just avoiding the news which given the recent recurring themes certainly would be fair enough, here is your final reminder that as of 1 July (2021) the rate of superannuation you must pay your employees increases from 9.5% to 10%.

Now that seems straight forward enough, but when building your budget for 2022, there are a couple things to keep in mind…

Interaction with Award Increases

For employees that are paid under an Award, they are entitled to a pay increase (calculated before determining their superannuation entitlements) in the 2022 financial year.

That is because following the Annual Wage Review 2021, the Fair Work Commission (FWC) announced a 2.5% increase to the national minimum wage and all award wages.

Though, this year, the increase to award wages is staggered across 3 stages.

Most Awards will see an increase as of 1 July 2021.  However, the Retail Award sees an increase from 1 September. And some 21 Awards, being in those industries considered to have been most affected by COVID restrictions, the increase will start from 1 November.

Regardless of when a particular employee’s award rate increases, it is important to remember that the pay increase is applied first, then their new superannuation entitlement calculated on top of that.

For Example –

If an Award rate was $25 per hour, the employee was entitled to $2.375 in superannuation (being an additional 9.5%).

Once the Award rate increases by 2.5%, their hourly rate will become $25.625.  Then when calculating their superannuation entitlement, the new rate of 10% must be used, resulting in $2.5625 in super per hour.

The result is an additional $0.1875 in super, which is actually an increase on the old amount of 0.789% (not just the 0.5% increase you may have expected).

Employees on Salary

For employees who are paid via salary (generally meaning the amount they earn each pay period does not vary depending on the time they work), how much their superannuation entitlement changes (and whether their Gross Salary (excluding Super) changes) will in general come down to whether they are paid a Salary incorporating Superannuation, or a Salary excluding Superannuation.

If the employment agreement is exclusive of Super, ignoring any separately negotiated salary increases, the amount of super that must be paid will simply increase by 0.5%.

However, if the agreement is inclusive of Super, which many employment agreements are these days (including for example all employment agreements here at CapitalQ), the employer has a decision to make!

Because technically, again ignoring any separately negotiated salary increases, the total amount the employer is required to pay, under their employment contract, doesn’t change.  And this means that the Gross Salary (excluding Super) they are now required to pay to the employee actually reduces, in order to cater for the extra super that must be paid (leaving the total salary package unchanged)

Look Beyond the Technicalities

Now as we say, technically that is the case, but we would encourage all employers to consider the spirit of the law change, and also how they wish to treat their employees, before making a decision to reduce an employee’s Gross Salary (exclusive of Super).

As most CapitalQ Community Members will know, in our “End Game” Business Investment Formula we consider People to be one of our Ultimate Alternative Assets that successful business owners should be investing in, in order to achieve real business success and their “End Game”.  This includes in particular, your business’ Team Members (employees).

And therefore we would advise in virtually all circumstances, even if technically your employment agreement is for a Super inclusive salary package, you should resist the temptation to use this law change to your advantage and instead increase your employees’ overall package by the 0.5% superannuation increase.

We are sure you will find it a worthwhile investment.

We can confirm this is 100% the approach we will be taking here at CapitalQ, and for those Clients for whom we assist with their payroll, we will by default increase all employees’ total salary packages, unless we are specifically instructed to do otherwise!