The ATO’s Practical Compliance Guideline, PCG 2026/1 – Payday Super: first year ATO compliance approach (the PCG) provides no real comfort for employers who do not comply with the strict provisions and time frames of the law. A legislative transitioning rule is needed that provides legal protection to employer’s.
The ATO acknowledges in the PCG that:
… 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 the Payday Super law commencing on 1 July 2026.
However, the PCG goes on to state that employers who make genuine efforts to meet their superannuation guarantee (SG) obligations on time, promptly address errors, and work cooperatively with superannuation funds are likely to be treated as ‘low risk’ under the PCG and will not be the focus of ATO investigations. In contrast, persistent failure to align payments with the new regime will attract compliance attention sooner.
A legislative transitioning period needs to be issued
There are many concerns with the PCG. Firstly, the PDS legislation must be complied with. Secondly, severe penalties and consequences apply for non-compliance. However, the only comfort provided to employers is a non-binding PCG in which the ATO states it must apply the law if the issues arise via a review or audit. The ATO has also confirmed that they must apply the law to any contraventions of the legislation.
There have been recommendations to Government to consider urgently legislating a transitional period which takes into account that there are likely to be many employers facing difficulty and potentially severe consequences despite making best efforts to comply. For example, direct claims from employees under the Fair Work Act 2009 (Cth) for not complying with their SG obligations under the national employment standards (NES).
Another concern is that digital service providers (DSPs) are currently not capable of consistently processing SG payments within the 7-business day timeframe. Data from a recent Small Business and Family Enterprise Ombudsman report shows that the total processing time using Treasury’s time frames for clearing houses and superannuation funds places the total processing time frame at approximately 8 business days. Understandably, many DSPs did not begin upgrading their systems until after the legislation was passed. Accordingly, it is not clear whether the DSPs will be able to facilitate a 7-business day time frame by 1 July 2026.
The recommendations to Government have also included the option to certify clearing houses so that these qualify for receipt of SG contributions, rather than the contributions having to be received by each superannuation fund. There will be a high number of small business employers with 19 or fewer employees (estimated to be around 250,000) who will lose the benefit of the Small Business Superannuation Clearing House (SBSCH) that provides a ‘safe harbor’ under the current SG regime which is proposed to be closed by 30 June 2026.
Without a legislative fix, employers are effectively being ‘thrown under the bus’ without any real protection come 1 July 2026 unless the systems are working as proposed.
Does an employer fall into the low, medium or high risk zone?
The PCG categorises employers into three zones, being low, medium and high risk. This helps the Commissioner prioritise how compliance resources will be applied during the initial year of the Payday Super rules (1 July 2026 to 30 June 2027) and gives employers insight into how the ATO will approach employer behaviour in the early compliance period.
Importantly, paragraph 3 of the PCG provides:
This Guideline does not replace, alter or affect our interpretation of the law in any way. Nor does it have any impact on obligations to pay superannuation contributions under other laws or industrial instruments and agreements, including where the obligations refer to the amount of superannuation that is to be paid for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA).
Thus, the PCG might result in the ATO not ‘looking’ if the employer is seeking to comply with the Payday Super regime. However, this provides no protection whatsoever if they are subject to any review or scrutiny. Further, the employer remains subject to the usual provisions under the Fair Work Act 2009 (Cth) such as being exposed to direct employee action for not making SG contributions on time and the risk of the ‘wage theft’ provisions that can result in substantial further consequences.
Low-risk zone
The low-risk zone reflects employers who have genuinely attempted to comply with Payday Super and taken steps to correct errors quickly. Broadly, this zone covers where the employer made on-time contributions and intended to fully meet its SG obligations, however, some contributions were not received by the fund on time. Those contributions are later received and allocated to employees as soon as reasonably practicable.
In the PCG, the ATO expresses that where an employer is classified as low risk, the ATO ‘will not have cause to review the employer’s actions’ during the transition period. This reflects an understanding that in the early stages of implementation, timing errors may occur due to system or operational issues outside employers’ direct control.
Medium-risk zone
The medium-risk zone captures employers that fall short of the low-risk criteria but nevertheless resolve all shortfalls within a defined period. Under the PCG, this is where ‘the employer does not meet the criteria to be in the low-risk zone, but the individual final SG shortfalls for all their employees are nil by the end of 28 days after the end of the quarter in which the qualifying earnings were paid’.
For example, an employer who continues to pay superannuation on a quarterly basis in the transition period, ie, not aligning payment timing with the 7-day requirement but ultimately ensuring SG is still paid. The PCG provides that ‘compliance resources may be applied to investigate whether the employer has an SG shortfall for one or more qualifies earnings (QE) days. Medium-risk arrangements will be given lower priority than arrangements that are rated high risk’.
High-risk zone
The high-risk zone is reserved for employers showing ongoing or unresolved non-compliance and will be the primary focus of enforcement. The PCG states that the high-risk zone includes situations where an employer has:
one or more individual final SG shortfalls greater than nil for their employees after 28 days following the end of the quarter in which the qualifying earnings were paid.
In practical terms, this applies to employers who make insufficient contributions (eg, failing to pay the required SG amount for one or more employees) and do not correct these shortfalls promptly. The ATO will allocate compliance resources first to high-risk employers, proactively investigating whether an SG shortfall exists.
Important takeaway from the PCG
It is important to note that employers can move between risk zones over time. For example, an employer who initially struggles with timely payments but then rectifies the issues and reduces all shortfalls to nil within the 28-day post-quarter window could move from medium to low risk. Conversely, repeated or unresolved SG shortfalls may see an employer shift to the high-risk zone.
Employers should attempt to promptly correct late SG payments and keep robust documentation to evidence that they took action to rectify any issues as soon as ‘reasonably practicable’ to minimise falling within the high-risk zone and attracting unwanted ATO attention.
Complexity abounds
The strict requirements of Payday Super are further exacerbated when considering that employer must also factor in the complex choice, default and stapled fund regime, see here.
There are also a number of statutory extensions to the normal employer-employee common law test including where SG is payable on payments to contractors where the payment is “wholly or principally for the labour of the person” under section 12(3) of the Superannuation Guarantee (Administration) Act 1992.
Further, there is complexity in calculating the amount of SG owing on each payday and Payday Super adds to this complexity by imposing tight time frames for employers and engagers of contractors to ensure that they pay the correct amount of SG within the 7-day time frame.
In this regard, Australia is known as having one of the most complex industrial relations and employment law systems in the world. Often the decision as to which award or industrial instrument applies to a given employee can turn out to be a major exercise and when multiple awards, contracts and instruments apply, employers often have to pay the highest amount to minimise risk.
Moreover, there are numerous tests that apply to determine whether a worker is an ‘employee’ or is an ‘independent contractor’ for SG and a multitude of similar tests for such things as PAYG, payroll tax, workover insurance and for Fair Work Act 2009 (Cth) purposes. This employee versus contractor test has been heavily litigated over many years and is still subject to considerable uncertainty in practice given the application of complex law to specific factual scenarios. Indeed, several experts may be needed to determine each of these different tests which involve state, federal and common law in respect of a particular ‘engager’ of a ‘contractor’. Naturally, this can prove a costly exercise.
Also, under Payday Super, most employees covered by the NES can take court action under the Fair Work Act 2009 (Cth) to recover unpaid super, unless the ATO has already commenced proceedings in relation to that super.
For example, employers in the hospitality industry often have not only permanent, part-time and casual employees but also possibly some contractors. Accordingly, these employers will have considerably more work and complexity as their number of possible contraventions goes from potentially 4 to 52 times each year, as many employers in this industry are required to pay weekly. Currently, these employers have 28 days after the end of each quarter to pay their SG. Under Payday Super, they will have 7-business days. These employers may have different awards with different pay rates for different time periods, different days, different skills levels, etc. The likely penalties that can compound for any errors can be substantial over time easily resulting in the employer becoming insolvent.
Closing comments
Employers relying on the PCG have no comfort from the application of the law. Hopefully, with the short-run way (less than 4 months) and the low preparedness to date to start with systems operating smoothly by 1 July 2026, the Government will issue transitioning relief to save many employers and jobs becoming extinct.
However, at this stage, employer’s cannot rely on transitioning relief and should not delay preparation. Employers and advisers need to be planning to comply with the Payday Super regime well before it starts on 1 July 2026 to allow sufficient time to upgrade systems, test them and undertake cash-flow planning.
