Companies that fail to comply with payday super rules through no fault of their own will avoid stiff penalties, the ATO says. Here’s how the three-tiered risk system will work.
What’s happeningThe Australian Taxation Office has released draft guidance showing that employers who fail to comply with payday superannuation rules through no fault of their own will escape harsh penalties when the reforms start on July 1, 2026.
Why this mattersThe ATO’s compliance approach recognizes that businesses will need time to implement, test and embed changes to their payroll systems, potentially avoiding what one expert called a “period of chaos”.
The Australian Taxation Office has indicated it will not harshly penalize small businesses struggling with the transition to payday superannuation, unveiling a risk-based compliance approach that recognizes the complexity of the July 2026 reforms.
To see: The Payday Super Bill arrives in Parliament with a $124,000 problem for SMEs
The draft guidance, which was published on October 9 alongside legislation tabled in Parliament, recognizes concerns that some employers will not have had sufficient time to implement, test and embed changes to their payroll systems and business processes before July 1, 2026.
Under pension benefit reforms, employers will be required to pay pension guarantee contributions at the same time as wages, rather than quarterly. Employers who fail to align their pension guarantee payments with regular weekly, fortnightly or monthly payroll payments could face significant financial penalties if the legislation is passed in its current form.
Three-layer risk system
To address the sector’s concerns, the according to the tax authorities it would use a three-tiered risk system, with companies that quickly identify and fix errors least likely to face an ATO investigation.
Employers may be considered low risk if they attempt to meet their super obligations on payday, discover that some or all of these payments do not reach an employee’s fund on time, but address the problem as quickly as reasonably possible.
“The risk level for these cases will depend on whether the error is corrected and how quickly the employer corrects the error,” the tax authorities said.
“An employer who corrects the error as quickly as reasonably possible will fall into a lower risk zone than an employer who does not.”
Medium risk companies may have a shortfall in super guarantees on payday, but ensure that the shortfall is zero 28 days after the end of the quarter in which the payment was due.
High-risk companies, and the companies most likely to attract the ATO’s ire, are those with outstanding super guarantee shortfalls outside that 28-day buffer.
The guidance covers the period from 1 July 2026 to 30 June 2027 and is subject to further consultation and eventual transposition of the payday super legislation into law. Feedback on the draft guidelines is open until November 7, 2025.
The industry welcomes balance
MYOB CEO Paul Robson said the ATO guidelines strike the right balance between penalizing companies that dodge pensions, while also preventing small employers from being penalized when late payments are not their fault.
“We are pleased to see that the government has taken industry feedback into consideration and taken a common sense approach to compliance deadlines,” Robson said.
“Small and medium businesses employ approximately two-thirds of Australia’s workforce, making their readiness essential to the successful rollout of Payday Super. Enabling these businesses to implement the changes effectively will be critical to achieving the objectives of the Bill.”
MYOB supports pension payments for approximately 1.2 million Australian workers through its software.
Xero Managing Director and Global Chief Strategy Officer Angad Soin said the company will work with the ATO to help small businesses already facing time, compliance and financial pressures.
Ben Thompson, CEO of Employment Hero, shared similar views, saying enforcement must recognize the reality of how small and medium-sized businesses operate.
“Employment Hero welcomes the introduction of the Payday Super Bill in the Australian Parliament. With the implementation date of July 1, 2026 fast approaching, this legislation provides much-needed clarity and certainty for Australian businesses as they prepare for one of the most significant payroll and compliance reforms in decades,” Thompson said.
However, not all voices from the sector were equally enthusiastic about the approach.
Richard Webb, pensions leader at CPA Australia, said the organization is pleased the government has heard calls for more proportionate penalties for small businesses that do not immediately comply with the new rules.
However, Webb noted that the three-tiered risk system is not the same as if the bill formally gave companies time to adapt.
“The July 2026 start date remains a major challenge,” Webb said. “A period of chaos could ensue as companies try to meet their compliance obligations while trying to balance their books.”
The compliance window
The legislation reflects a significant change advocated by the industry, with the compliance deadline being revised from seven calendar days to seven working days.
Employers must generally ensure that contributions reach employees’ pension funds within seven working days of payment of eligible earnings. Qualifying earnings are a new concept that includes ordinary time earnings, salary sacrifice retirement contributions, and other amounts currently included in an employee’s salary or wages for retirement security purposes.
An extended time frame for making contributions will apply in certain circumstances, for example where an employer is contributing to a pension fund for the first time for an employee, including new employees, when payments of eligible income are made to an employee outside their regular pay cycle, and where exceptional circumstances have affected the ability of multiple employers to make pension contributions on a large scale.
What companies need to know
The reforms represent a significant shift in the way pensions are paid and monitored. New modeling from Employment Hero shows that small and medium-sized businesses face a working capital shortfall of $124,000 to meet the new demands.
A survey of Employment Hero customers found that 15% of small businesses are still unaware of the payday changes, while 32.5% say they will need to build cash reserves to maintain solvency under the new system. More than 20% of companies said they could adjust their payroll cycles to meet requirements, despite 84% of employees opposing such changes.
The reform aims to address widespread underpayment problems. Data shows one in four workers in Australia are affected by unpaid super, with $5.1 billion going unpaid for 2.8 million Australians in 2021-2022. The average underpayment was $1,800 per employee, with $100 million in super costs not reaching employees’ accounts every week.
AustralianSuper General Manager for Retirement Shane Hancock said research shows there is strong public support for the change. Recent research commissioned by the Association of Superannuation Funds of Australia found that 80% of respondents agreed that super costs should be paid at the same time as wages.
“For many working Australians, this means their super will be paid for sooner and invested sooner, maximizing the benefits of compound growth. Payday super will also help address issues of unpaid and underpaid super, ensuring Australians receive the super they have earned,” Hancock said.
Treasurer Jim Chalmers told Parliament that workers will benefit from more frequent and earlier super contributions that will multiply over their working lives, with the average 25-year-old worker earning the equivalent of an extra $6,000 in today’s dollars upon retirement.
Currently, when the ATO responds to an employee complaint about unpaid super, it may investigate two years of unpaid contributions. The Government is investing in the ATO’s ability to detect suspected non-payment of supertime in real time as part of the reform.
As part of the changes, the Small Business Superannuation Clearing House will be decommissioned from 1 July 2026 and closed to new users from 1 October 2025. The improvement in payroll software solutions in recent years provides employers with cost-effective and higher-quality options to make pension contributions more timely and accurately.
The bill will now move through Parliament, with businesses closely monitoring both the legislative process and the ATO’s final compliance guidance ahead of the July 2026 implementation date.
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