Pay Day Super Getting It Right from Day One

In October 2023 Treasury released a consultation paper headed Securing Australians’ Superannuation and this was the first indication of the Pay Day Super changes that are now upon us.  The objective behind Pay Day Super is to ensure that employers pay all employee superannuation entitlements on a regular basis to minimise the potential future non-payment of employee superannuation entitlements.

Pay Day Super has now been legislated and takes effect from 1 July 2026.

The Pay Day Super rules seek to achieve its objective by requiring employers to pay superannuation within 7 business days of paying an employee, with the contribution needing to be received by the employee’s nominated superannuation fund within that timeframe. These rules apply to all employers.

Given there are penalties for late payments it will be wise for employers to review their current pay cycles and assess whether such pay cycles are appropriate or should be altered. 

Under the previous rules employers commonly used clearing houses to process superannuation payments. That is, the employer would calculate the superannuation entitlement owing for each employee and then forward the money together with a summary of the amount payable for each employee to the clearing house. Clearing houses typically did not charge fees for this service, as they were able to hold the funds on deposit for a period of time and generate interest before remitting the amounts to employees’ superannuation funds.

Under the new Pay Day Super rules, clearing houses will no longer be able to retain funds for any meaningful period. This significantly reduces their ability to generate income from these deposits and is likely to result in the introduction of clearing house fees.

If this occurs, the frequency of payroll will directly impact administration costs. The more often employees are paid, the more frequently superannuation contributions must be processed, increasing clearing house fees and compliance risk.

We would be recommending that weekly pay cycles be changed to fortnightly pay cycles as this will halve the number of superannuation payments required each year, halve the potential clearing house charges and reduce the likelihood of breaching the Pay Day Super rules and incurring penalties.

Pay Day Super – The General Rule – Pay within 7 Business Days

From 1 July 2026, employers will have 7 business days after the “Qualifying Earnings Day” (QE Day) to pay an employee’s superannuation entitlements for that pay cycle to the employee’s nominated superannuation fund. 

Importantly, to be considered “on time” contributions the employee’s superannuation fund must have received the contribution within the 7 days permitted from the day of the last pay cycle (i.e. the QE Day).  It is not sufficient for the employer to merely send the payment within that timeframe.

The definition of “Qualifying Earnings” (i.e. QE) is important because this determines what amounts are included in calculation of the SGC superannuation payable by employers at the current rate of 12%.  Qualifying Earnings are amounts covered by one or more of the following:

• The employee’s “Ordinary Times Earnings” (OTE)

• All commissions payable to the employee

• All payments for the performance of the person’s duties as a member of the executive body (e.g. member of the board of directors)

• All payments under a contract that is wholly or principally for the labour of a person as the person is considered to be an employee of yours

• Salary sacrifice amounts that an employee directs the employer to make additional contributions to that employee’s superannuation fund

To recap on what is Ordinary Times Earnings, OTE of an employee or deemed employee means all of the person’s earnings as an employee made up of:

• Earnings in respect of ordinary hours of work; and

• Earnings consisting of over-award payments, shift-loadings or commissions

other than a lump sum payment of any of the following kinds made to the person on the termination of the person’s employment:

• A payment in lieu of unused sick leave

• An unused annual leave payment or unused long service leave payment

Note that if you are using a clearing house to process the superannuation payments for your employees the onus remains with you to ensure that the payments are made within the 7 business days permitted. 

If you are using the Small Business Superannuation Clearing House (SBSCH) you should note that this service operated by the ATO will cease operation on the 30 June 2026.  Consequently, you will either need to have your payroll officer or department internalise the process or engage a new clearing house to process the superannuation payments.

Pay Day Super – The Exceptions to the General Rule (i.e. extended time to pay)

There are some exceptions to the new 7 business day payment requirement as set out above and these exceptions are as follows:

• New Employees - If you employ a new employee you will have up to 20 business days to make the first payment of that employee’s superannuation entitlements.

• Existing Employee Switches Superannuation Provider - Where an existing employee changes their superannuation provider the employer will have up to 20 business days to make the first payment to the new superannuation fund nominated by the employee.

• Out of Cycle Employee Payments - If an employer were to make a payment to an employee that is not part of the typical pay cycle (i.e. it is not made on a Qualifying Earnings Day) then to the extent that this payment forms part of the employees Ordinary Times Earnings the employer may align the Superannuation Guarantee Charge payment with the next QE Day.  The employer then has the usual 7 business days in which to make the superannuation payment on behalf of the employee in receipt of the out of cycle payment.  Typically this will involve bonuses and commission payments.

What happens if the employee’s superannuation contribution is not received by the Fund within the required timeframe?

If the employer fails to ensure that the superannuation contributions for employees are received by the employees’ superannuation funds within the allowable time frame then a Superannuation Guarantee Charge (i.e. SGC) arises. 

The SGC for the relevant QE Day comprises of the following components:

• Total of the Employer’s Individual Final SG Shortfalls for the relevant QE Day

• Plus, Sum of all individual notional Earnings Component for the relevant QE Day

• Plus, Administrative Uplift amount for the relevant QE Day

• Plus, Total of the Employer’s Choice loadings for the relevant QE Day (if any)

Individual Final SG Shortfalls = The Individual SG Amount that remains outstanding at the time the SGC Assessment is made after applying all “on time” contributions (i.e. contributions made by the employer for the employee on time) and late contributions (being contributions made after the permitted time frame but before the issuing of an ATO assessment) for each employee.

Individual SG Amount = All employers have an Individual SG Amount for an employee for a particular QE Day.  This is the minimum amount of SG that the employer must pay for their employee to avoid the SGC.  The Individual SG Amount is calculated by applying the current SG rate of 12% to the amount of Qualifying Earnings for the QE Day.

Individual Base SG Shortfall = The Individual SG Amount less any “on time” eligible contributions gives you the Individual Base SG Shortfall.  Where the employer makes sufficient contributions that are received by the employee’s superannuation fund within the required time frame (typically 7 business days) of the relevant QE Day the Individual Base SG Shortfall will be $Nil.

Notional Earnings = Notional Earnings are calculated by multiplying the ATO General Interest Charge rate (GIC) and the Individual Base SG Shortfall.  Notional Earnings are compounded daily.

An employer will begin to accrue individual notional earnings for each employee if you have an Individual Base SG Shortfall for any one or more employees.  The notional earnings will begin to accrue the day after the last day to make an “on time” contribution and will cease at the earlier of:

(i) The day the employer makes a late eligible contribution that reduces your Individual Final SG Shortfall for the employee to $Nil;
(ii) The day the ATO makes an SGC Assessment

Administrative Uplift Amount = You will have an initial administrative uplift amount of 60% of your total Individual Final SG Shortfalls and total individual Notional Earnings components for a QE Day.

Employers should look to ensure that all SG superannuation contributions for each employee are paid “on time”.  Even if paid late it is still better to pay late and before the ATO issue an assessment than wait for the assessment to be issued by the ATO.

What Happens if an employer receives a SGC assessment from the ATO?

If an employer receives a SGC Assessment from the ATO the employer has 28 days to pay the amount in full.  Failure to pay the SGC Assessment within the 28 day period will result in the ATO issuing a Notice to Pay.  If the amount remains outstanding after a further 28 days the employer will be liable to pay a late payment penalty for any amounts that remain unpaid.

The late payment penalty is generally up to 25% of the amount outstanding.  However, this will increase to 50% of the outstanding amount if the employer has been liable for the same penalty in the previous 24 months.

Note also that the late payment penalty cannot be remitted.

Tax Deductibility of Superannuation and related payments

Under the current system if an employer pays the superannuation guarantee amount late (i.e. after the 28th day of the end of each quarter) the employer is denied a tax deduction for the amount paid late.

The new Pay Day Super rules give the employer the ability to claim a tax deduction for the following:
(i) “on time” and late superannuation contributions; and
(ii) SGC

However, any GIC that accrues on the SGC amount or the amount of any late payment penalty that was imposed for failing to pay the SGC amount will not be tax deductible.

Salary Sacrifice Arrangements

The Pay Day Super rules only apply to the Superannuation Guarantee amounts and do not apply to any salary sacrifice arrangements.  Hence, after 1 July 2026 the employer remains obligated to pay any salary sacrifice contributions by either the due date specified in the salary sacrifice agreement or, if no date is specified, by the end of the relevant quarter.

Salary sacrifice amounts cannot reduce an employer’s Individual SG amount.

Recommendations

Employers have less than 6 months to ensure that they are ready for the Pay Day Super rules commencing on 1 July 2026.  To ensure employers are ready they should:

(i)  Review employee records and ensure that they have up to date information of all employee’s nominated superannuation funds
(ii) Review on-boarding processes for new employees to ensure that the information is captured efficiently and accurately in respect of their nominated superannuation fund
(iii) Review pay cycles.  If paying on a weekly basis at present it may be an opportune time to consider moving to fortnightly pay cycles as this will halve the number of superannuation payments required each year and halve the chances of breaching the new rules
(iv) If using a clearing house (other than the ATO’s SBSCH) clarify with them what the timing needs to be to ensure that they have sufficient time to process payments to all employees’ superannuation funds.  Also seek clarification as to whether the clearing house will be making changes to the way they charge.
(v) If using the ATO SBSCH you will need to either bring the payment process in-house or engage a new clearing house to process the payments on your behalf.
(vi) Review cash flows and build budgets around the more regular payment of superannuation entitlements.