Superannuation Guarantee increases to 12%, eventually

Note: This article explains the Superannuation Guarantee rate. If you’re seeking information on other superannuation rates and thresholds see SuperGuide article Super rates and thresholds for the 2012/2013 year.

In the 2013 Federal Budget papers, the planned increase in Superannuation Guarantee contributions from 9% to 12% over the next 7 years is treated as a key initiative of the 2013/2014 Budget, even though the policy was announced and legislated many months earlier.

Effective from 1 July 2013, the Superannuation Guarantee percentage will increase to 9.25%, and will eventually rise to 12% by July 2019.

Superannuation Guarantee (SG) is the official term for compulsory superannuation contributions made by employers on behalf of their employees. An employer, regardless of whether they are a small or large business, must currently contribute the equivalent of 9% of an employee’s salary.

In May 2010, employed Australians received a pleasant surprise when the Federal Treasurer, Mr Wayne Swan, announced that compulsory employer super contributions were set to jump from the current 9% of salary to 12% by July 2019, an eventual 33% increase in Superannuation Guarantee (SG) contributions.

On 29 March 2012, the proposed increase in SG entitlements received Royal Assent and became law, which means SG contributions will definitely increase to 9.25% from July 2013, and gradually increase to 12% from July 2019.

The increase in SG contributions is a stepped process starting with a 0.25% in the 2013/2014 financial year, and then a 0.25% increase in the 2014/2015 year. For the following 5 years after the 2015 financial year, the SG rate will increase by 0.5% until it reaches 12% from July 2019 (see table below).

Superannuation Guarantee entitlements

Source: Adapted from table appearing in Australian Government fact sheet ‘Superannuation – Increasing the Superannuation Guarantee rate to 12 per cent’ located on the ‘Stronger, Fairer, Simpler’ website (www.futuretax.gov.au)

The SG increase has significant financial implications for anyone expecting to remain in the workforce for more than 7 years, because the full 3% increase takes affect from the start of the 2019/2020 year – in just over 6 years’ time. According to the Federal Government, the 33% increase in the SG rate will give a 30-year-old on average full-time wages and extra $108,000 in retirement savings just by turning up for work.

There has been, and will continue to be, some resistance from employers, especially small business employers, to this policy. The federal government argues however that the 3-year lead time (from May 2010 through to July 2013) before the phased increases begin should have given employers plenty of time to prepare for the increase.

An interesting stumble in the selling of the SG increase, is that the company tax rate was eventually going to fall to 28% which the Government argued would soften some of the SG increase for employers. The promise was that from July 2013, the company tax rate would decrease to 29% (from 30%) and from July 2014, the company tax rate would decrease to 28%. During 2012, the Government announced that the company tax rates would not go ahead – ouch!

In any case, the federal government further argues that due to the lengthy lead time, employers will be able to take the SG increase into account when negotiating future wage agreements, and that the SG rate increase won’t stop real wages growing.