- Christmas time is right around the corner, and for businesses, especially small ones, it means a lot of financial matters need to be taken care of.
- Dealing with those cashflow issues by keeping super entitlements of your employees is not the best option for you.
- In order to avoid cashflow problems and risks related to employee super, we're giving you practical tips to get through the holidays as best as possible.
Dealing with cashflow issues by not paying employees their super entitlements is becoming more of an issue in Australia, especially among SMEs. And in the lead up to Christmas, the temptation can be greater than ever.
If companies undertaking this type of practice become insolvent, the affected employees may never see those entitlements. The statistics around employees being short-changed their super are startling. In fact, an Industry Super Australia analysis found that in 2013-14, almost one in three employees missed out on $5.6 billion in unpaid super contributions – or around $2025 per person. According to Super Australia, this equates to a loss of around $24,000 in super for those close to retirement.
Whether it is underpayment or non-payment of super, this highlights a real concern for Australian businesses.
Half of super debts relate to insolvency
The ATO has previously indicated that about 50% of superannuation debts it deals with relate to insolvency. Australian Securities and Investment Commission data indicates non-payment of super is more common in:
- accommodation and food services,
- business and personal services,
- retail trade, and
- transport industries.
The practice of using employees’ super to deal with cash-flow problems can arise for a number of reasons, such as debtors failing to pay on time. When this happens, super contributions are often turned to as a way to cover shortfalls.
There are, of course, penalties for not paying super obligations. Minimum Super Guarantee Contributions must be paid to an employee’s nominated fund by the quarterly due date. A failure to do this comes with penalties, which includes a 10% interest charge on the outstanding amount, as well as an inability to deduct this expense for tax purposes.
In addition, directors can be held personally liable for unpaid Super. The ATO can issue a Director Penalty Notice to directors where the company has failed to pay its super obligations. Further, if companies fail to report its super obligations, they could find themselves automatically personally liable without recourse.
Employees are being short changed
However, if an employer becomes insolvent and has not paid its super entitlements then it becomes even more of an issue for employees. When a business collapses, employee entitlements are paid before unsecured creditors, which means that employees get paid:
- their wages,
- annual leave entitlements and
- redundancy entitlements
before anyone else, other than those that may hold security over assets.
But if there isn’t any money available, employees don’t receive anything unless they are eligible for the Fair Entitlements Guarantee (FEG), provided by the Federal Government, which protects employee entitlements. However, it does not protect Superannuation Guarantee entitlements.
We’ve come across a large number of companies in our insolvency work that “borrow” their staff’s super to bolster cash flow.
The issue of companies, particularly SMEs, using their employees’ unpaid superannuation to manage cash-flow shortfall is a major issue in Australia – and employees need to be more vigilant.
Running a small business can be tough, especially in the lead up to Christmas when cash flow is tight. But there are smart ways to free up cash and remove stress, without dipping into employee super. After all, it could cost you a lot more in the long run.
5 smart ways to address cashflow woes:
1. Think long term
As we quickly approach 2018, there are a few things you should do:
- revisit your business plans,
- budgets and
- long-term strategy.
If your business has debt:
- consider a review of your financing needs,
- determine the amount of debt you need and the amount needed to have it in place.
There may be a better deal/structure if you ask your financier.
2. Resolve late payments
Overdue payments are a huge burden on small business cash flow. Make a note of clients who are sitting on outstanding invoices and deal with late payers so you can get that cash in your bank account before the holidays. Consider asking customers for part payment upfront, shortening payment terms or offering incentives for early payments.
3. Don’t hold onto excess stock
If you are holding onto excess stock, consider what you need to get rid of. Avoid paying interest on stale inventory or hoarding last season’s stock by selling it at a discounted price to get it out of the door.
4. Develop a cash flow strategy
Cashflow management is key to running a successful business, to ensuring you can repay debt, and plan for growth. Start monitoring for
- operating expenses,
- stock levels,
- debt collections, and
5. Ask for help sooner rather than later
The worst thing you can do is put your head in the sand and pretend everything is fine. Remember to ask for help before it’s too late by talking to your creditors and/or professional adviser like your accountant (or insolvency/turnaround practitioner).