Payday super part 2: not quite ‘all systems go’

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The new payday super regime will require employee superannuation to be paid by employers more frequently. In the second of a two-part series, this article explains why the race is now on to get the necessary systems ready in time.

This article is the second in a two-part series that shares the author’s insights on the new Payday Super (PDS) law and implementation of the reforms. Part 1 last week highlighted the problem PDS is designed to solve, recapped the current law, and explained the operation of the new law.

In writing this article, the author has extensively used acronyms for brevity. To assist readers, a list of these acronyms and terms is provided at the end of the article.

Now the work begins

The PDS reforms are now law and start on 1 July 2026. The reforms will require employers to pay their employees’ superannuation at the same time as salary and wages, instead of quarterly. Small business employers are most likely to find the cash flow challenges associated with PDS harder to navigate. With less than eight months to go, the race is on to get systems and employers ready for the most substantial change to superannuation in more than 30 years.

The legislative framework is finally in place. The focus now turns to the digital service providers (DSPs) who, understandably, have been waiting for the enacted law before proceeding and commercially investing time and money in the extensive work required to upgrade payroll and related systems in readiness for PDS.

The government acknowledged in the explanatory memorandum to the enabling legislation that:

Changing the frequency of SG payments would require significant work for DSPs, which produce and maintain the systems used by employers and superannuation funds to record, report and process SG contributions.

Further:

Providing 18 months in lead time between the planned legislation of the changes in late 2024 and the start date of 1 July 2026 will also mitigate negative impacts on DSPs.

As it has played out, the law being assented last week means that DSPs have less than eight months to design, test and roll out the necessary systems so employers can implement changes in their processes, enabling them to comply from their first qualifying earnings (QE) day on or after 1 July 2026. Other intermediaries, such as payroll service providers, clearing houses and similar support services, are more than mere observers; they must also make substantial changes to their systems and processes.

What’s still an issue?

A short runway to 1 July 2026

Concerns regarding the readiness of the system and employers from 1 July 2026 were frequently raised throughout consultation, particularly given that, just over a month ago, the enabling legislation had not yet been introduced.

Even the ATO has acknowledged these concerns:

There is concern that employers will not have had sufficient time to deploy, test and embed changes within their payroll systems and business processes prior to Payday Super law commencing on 1 July 2026. This increases the risk that employers will be unable to fully meet the requirements to reliably have contributions processed and accepted by super funds in the Payday Super timeframes.

Practical approaches, including a minimum 12-month deferral or transitioning large employers to PDS before small business employers, were repeatedly recommended by the professional associations and other key stakeholders. Yet, the Government has remained firm on its announced start date of 1 July 2026.

ATO transitional approach

Disappointingly, a warranted but absent transitional rule of law to gently ease employers into the new regime has instead been addressed through an ATO administrative position that provides little protection or certainty to employers.

The ATO has published draft guidance on its compliance approach for the first year of PDS. PCG 2025/D5 sets out the factors the ATO will consider when deciding how to apply its compliance resources to investigate employers who try to do the right thing from 1 July 2026 to 30 June 2027. The ATO recognises that these employers should not be the focus of ATO compliance action.

The ATO will prioritise compliance resources in respect of employers in the high-risk (red) zone ahead of those in the medium-risk (amber) zone. The ATO will not have cause to apply compliance resources in respect of employers in the low-risk (green) zone.

●              Green zone: the employer attempts to reduce their shortfall to nil by making sufficient on-time contributions, but some of or all the contributions were not received by the fund within the usual period, and the contributions are received by the fund and allocable for the employee’s benefit as soon as reasonably practicable.

●              Amber zone: the employer does not meet the criteria to be in the green zone but has no shortfalls by 28 days after the end of the quarter in which the QE were paid. This would apply to an employer that makes sufficient contributions but does not change the frequency of contributions in line with PDS.

●              Red zone: the employer does not meet the requirements to be in the green or amber zone and has one or more shortfalls by 28 days after the end of the quarter in which the QE were paid.

I say that the ATO’s compliance approach provides little protection or certainty to employers during 2026–27 for the following reasons:

●              Falling within the green zone does not mean that the employer will not be liable for the SG charge. It means that the ATO won’t allocate compliance resources to investigate those employers who are considered to fall into the green zone.

●              The ATO cannot disregard the law. It must assess the SG charge if it obtains information that an employer has a shortfall in respect of a QE day, even if the employer falls within the green zone.

●              An employer may consider they fall within the green zone, but the ATO will decide whether contributions are received by the fund and allocable for the employee’s benefit as soon as reasonably practicable.

●              An employer may be in the green zone for some QE days and move to another risk zone for other QE days. This is likely to confuse employers.

●              The PCG contains no guidance or examples where the contribution is late due to delays or factors beyond the control of the employer, leading to uncertainty. This is likely to be a common issue for employers.

●              The PCG does not have any impact on obligations to pay superannuation contributions under other laws or industrial instruments and agreements.

●              The PCG does not prevent an employee from making a complaint and taking recovery action under the National Employment Standards (see below).

National Employment Standards

The National Employment Standards (NES) make up the minimum entitlements for employees in Australia. Superannuation is an entitlement under the NES. Entitlements to superannuation under the NES align with the superannuation laws, so an employer who complies with the SGAA also meets their obligations under the NES.

A breach of the NES means that most employees covered by the NES can take court action against their employer under Part 4-1 of the Fair Work Act 2009 (FWA) to recover unpaid superannuation, unless the ATO has already commenced proceedings in relation to that superannuation.

Whether the ATO investigates an employer that has not paid the minimum SG for their employees is completely independent from whether employees take legal action against their employer under the FWA for late or non-payment of superannuation.

Usual period

Eligible SG contributions received by employees’ funds and allocable to the employee’s account within seven business days after the QE day (the usual period) can reduce the shortfall for that QE day to nil. The usual period of just seven business days will be extremely challenging for employers.

Processing times vary, but contributions commonly take up to 10 days to reach the fund when passing through commercial clearing houses. Even if the employer makes the payment on the QE day, when the fund receives the contribution is clearly out of their hands.

On one hand:

●              commercial pressures on clearing houses, DSPs and other intermediaries to meet the market demands of employers and facilitate them in making SG payments within the usual period are likely to reduce processing times;

●              a longer period of 20 business days has been allowed for new staff, change of funds and for exceptional circumstances; and

●              the deadline for funds to allocate or return contributions that cannot be allocated to an employee’s account has been reduced from 20 business days to three business days.

On the other hand, the scope of what constitutes ‘exceptional circumstances’ seems narrow and would likely not apply to:

●              common delays in processing or banking;

●              computer and system glitches that are not widespread outages; or

●              payroll staff absences.

Despite the employer’s best efforts, contributions could easily be late. This commonly happens when incorrect employee details are supplied. If a fund receives an on-time contribution within the usual period and returns the amount to the employer because it could not be allocated to the employee’s account, the employer would not have made an eligible contribution. The employer is unlikely to have sufficient time to obtain the correct employee details and attempt to repay the SG, so that an on-time contribution is made.

Employers bear all the risk and are fully exposed. Employers have no comfort that their payments will be received and be allocable to their employees’ accounts within the usual period, yet they remain solely liable for the SG charge should the exceedingly tight timeframe be exceeded. There is no wriggle room for something to go wrong, and no time to correct it. This is unreasonable.

Overpayments

Any overpayments by an employer for a QE day are automatically applied to offset any subsequent SG for that employee. But this approach supposes that the employee continues to be employed by, and has future QE days with, the employer.

Where the employer pays more than the SG for a QE day and the employee leaves the employer, the overpayment cannot be recovered. This could easily occur when QE are paid, say, monthly, two weeks in arrears and two weeks in advance, SG is paid based on the QE, and the employee leaves abruptly without being entitled to the QE paid in advance.

Some employers may be considering prepaying SG amounts (up to 12 months) to avoid any risk of not making contributions on time. However, this approach poses a separate risk of paying amounts for employees who depart during the year, resulting in overpayments that cannot be recovered.

Managing cash flow

Cash flow will be the single largest PDS issue for many small businesses to navigate. Moving from quarterly to as frequent as weekly payment obligations will likely place an enormous strain on cash flow.

Some employers are thinking of changing to less frequent payroll cycles. Transitioning to monthly payroll may improve cash flow, but employers must be aware that such a change may be prohibited by relevant awards, enterprise agreements or employment agreements. Some awards and agreements require employers to pay their employees weekly or fortnightly. A monthly cycle may not be permitted. Employers should seek independent advice before attempting to shorten the frequency of their payroll cycle to ensure they comply with relevant laws, awards and agreements.

Further, monthly payroll is usually unpopular with employees as they are paid less frequently. It could lead to dissatisfaction levels that affect staff retention. Employers should carefully weigh the operational benefits against the possible impact on employee satisfaction before making any changes to payroll frequency.

Monthly payroll may also increase the risk of overpayments, as discussed above.

Small Business Superannuation Clearing House

As part of the PDS reforms, the ATO’s Small Business Superannuation Clearing House (SBSCH) will be retired from 1 July 2026. The SBSCH has been closed to new users since 1 October 2025.

Hundreds of thousands of users will need to find a commercial clearing house or adopt suitable payroll software. Those employers who do not prepare for the closure may find themselves rushing to source alternate ways to pay their SG for the June 2026 quarter by 28 July 2026 or risk becoming liable for the SG charge. Practically, the March 2026 quarter may be the last one that is processed through the SBSCH.

Maximum contribution base and employer shortfall certificates

As explained in Part 1, the current maximum contribution base (MCB) will apply annually instead of quarterly. Once an employee’s QE exceed the MCB in a financial year, any subsequent QE by that employee in that year, paid by their current or subsequent employer, are disregarded in calculating any shortfall amount.

The employer shortfall exemption certificate rules have been modified to allow employees to apply for a certificate if they have more than one employer in the same financial year, consecutively as well as concurrently. If a certificate is in force, the employee is treated as having reached the MCB. The employee can provide the certificate to their new employer, who is not liable for the SG charge if they don’t pay SG for that part of the employee’s QE above the MCB.

Under the current law, when an employee exceeds the MCB, their SG contributions max out at $7,500 a quarter. Under PDS, assuming the concessional contributions cap remains $30,000 in 2026–27, the annual MCB would be $250,000, and the maximum SG for the year would be $30,000.

Applying the MCB annually rather than quarterly is likely to increase the complexity of salary packages, as the cap will be reached before the end of the financial year. The more the employee’s QE exceed the MCB, the sooner in the financial year the MCB will be reached. The consequences will also depend on:

●              whether the employee’s remuneration package is inclusive or exclusive of SG; and

●              the extent to which the employee, on a package inclusive of SG, can seek to have their salary component recalibrated within the terms of their employment contract once the MCB is reached and the employer no longer has an SG obligation for the remainder of the year.

In the case of salary plus SG, the salary component will not change when the cap is reached.

Example

Employee 1 has an annual salary of $450,000, including SG, paid monthly. Employee 1 will reach the MCB in February. They should seek to have their gross salary for the remaining five months of the financial year increased from $33,482.14 to $37,125.00, so that their salary for the year is $420,000 plus SG of $30,000, equating to a total package of $450,000.

Employee 2, in contrast, has an annual salary of $450,000, plus SG, also paid monthly. With $4,500 a month of SG, Employee 2 will reach the MCB in January. However, while the employer stops paying SG in February, Employee 2’s gross salary for the year remains unchanged at $37,500 per month. So, their salary for the year is $450,000 plus SG of $30,000, equating to a total package of $480,000.

Foreign employers

No changes have been made to the SG rules as they apply to foreign employers. This means foreign employers that have non-resident employees working within Australia will need to pay SG under PDS at the same time as they pay the employees’ QE, unless they are covered by a bilateral social security agreement that exempts them from paying SG in Australia. Foreign employers must pay SG for resident employees working here.

Foreign employers that do not have any employees working in Australia have no SG obligations.

Australian employers must continue to pay SG for resident employees working overseas, but may apply for a bilateral social security agreement that exempts Australian employers from their SG obligations in the country where their employee is temporarily working.

Complying status of SMSFs

The following comments relate to self-managed superannuation funds (SMSFs) as APRA-regulated funds are less likely to be non-complying funds.

To comply with the SGAA, employers must make SG contributions to a complying fund. Employers can use Super Fund Lookup (SFLU) to check if a fund is a complying fund or obtain written confirmation from the fund’s trustee.

Aside from employers needing to check whether their employees’ SMSFs are complying funds so they can receive SG contributions, they also need to be aware that once an SMSF’s annual returns are two weeks overdue, the status of the fund changes to Regulation details removed on the SFLU. Once this happens, SuperStream prevents the employer from making SG contributions to the fund. Once the employer is notified of this, they are left with only a few business days to redirect the contribution to another complying fund to meet their SG obligations.

The overlay of PDS means employers will have to be even more diligent with checking the compliance status of their employees’ SMSFs. Ideally, prudent employers would check this each QE day, but this is hardly practical. Given this, the increased frequency of paying SG may make SMSFs less attractive to employers, but they must still comply with the choice of fund rules.

Closing comments

With so many aspects to PDS, employers, tax professionals and bookkeepers must be across the new rules. While the DSPs are busy designing the new systems that will be needed, tax practitioners can start having the necessary conversations with their clients now. Employers can start to review their software, systems and processes to identify what is needed to be PDS-ready.

We have only a short runway to 1 July 2026, and we cannot still be building the aircraft as it’s taking off. With the festive season soon upon us, we have effectively only a little over six working months to get all systems go.

Acronyms and terms used in this article

●              ATO                                    Australian Taxation Office

●              DSPs                                   Digital service providers

●              FWA                                   Fair Work Act 2009

●              MCB                                     Maximum contribution base

●              NES                                     National Employment Standards

●              PDS                                     Payday Super

●              QE                                      Qualifying earnings

●              QE day                              Day on which QE are paid

●              SFLU                                    Super Fund Lookup

●              SG                                      Superannuation Guarantee

●              SGAA                                    Superannuation Guarantee (Administration) Act 1992

●              SMSFs                                 Self-managed superannuation funds

●              Usual period                     Seven business days after the QE day

17 November 2025
By Robyn Jacobson, Tax Advocate and Specialist
accountantsdaily.com.au