Salary sacrificing, which is also called salary packaging, allows an employee to forgo some of their future entitlement to salary and wages in return for a benefit of a similar value, such as superannuation contributions, a car or other expenses. From 1 January 2020, the law was amended to stop employers from offsetting an employee’s salary sacrificed superannuation guarantee contributions against the employer’s superannuation guarantee liabilities. This may increase the amount of super an employer is now required to make for an employee.
Effective salary sacrifice arrangements
For a salary sacrifice arrangement to be effective, an agreement must be made between an employee and an employer before the employee earns the income or an allowance accrues for the work undertaken. If the agreement is not made until after the income has been earned, then the salary sacrifice agreement is usually ineffective. This will include any salary and wages, leave entitlements, bonuses or commissions that were accrued or earned before an employee has entered into the arrangement.
The salary sacrifice agreement should clearly set out the terms of what has been agreed and it should be in writing. The agreement should include a degree of flexibility to allow the employee or employer to renegotiate the arrangement if required. An example requiring renegotiation may include a change to the law, which may increase or decrease the tax-deductible amount for super contributions. Any amendment to the agreement should take place prior to earning the income or allowance and undertaking the work.
Once the salary sacrifice agreement has been made, the employee permanently give up the right to the salary that has been sacrificed as agreed. If the fringe benefit has not been provided during the period or the benefit ends up being less than the agreed value and it is cashed out it, will be treated as salary and taxed as normal income. This may occur if the employer has not made the total contribution to super as agreed due to changes in the maximum deductible contribution and refunds the difference to the employee.
Some payments made by your employer at your direction are not considered to form part of your salary sacrifice arrangement. The payments include amounts deducted from your salary after you have earned it and tax has been deducted. They can include amounts deducted for health insurance premiums, loan repayments, union fees or credit card repayments.
Salary sacrificing towards super
Salary sacrificed super contributions made to a complying superannuation fund are treated as employer contributions made for an employee and are not fringe benefits. However, contributions paid to a non-complying super fund are treated as a fringe benefit. And, if an employer makes a super contribution for an associate of an employee such as their spouse, the contribution is treated as a fringe benefit.
From 1 January 2020, salary sacrificed contributions to super are no longer counted against an employer’s super guarantee contributions. For example, if an employee elects to salary sacrifice 5% into their super, the employer will still be required to pay super guarantee contributions. This is currently 9.5% of an employee’s ordinary time earnings base, which includes the amount salary sacrificed into super. If an employer does not pay the required amount of superannuation guarantee contributions, an employer will be liable for the super guarantee charge which is calculated on the total salary and wages paid to the employee.
In this simplistic case study, let’s assume Wendy is on a remuneration package of $100,000 p.a. and decides to sacrifice $10,000 of her salary into her super. Until 31 December 2019, employer contributions would have been calculated on Wendy’s earnings for ordinary hours of work, which would be $90,000. The employer’s super guarantee liability would have been calculated on $90,000 (9.5%) which is $8,550.
From 1 January 2020, Wendy’s employer will be required to calculate her super on her employment package prior to the reduction of the amount she salary sacrificed to super. The employer’s superannuation guarantee liability will now be $9,500 calculated as 9.5% of the net salary of $90,000, plus the amount she salary sacrificed $10,000 which equals $100,000.
Limitations on salary sacrifice to super
Unless there are limits in your employment agreement to the amount that can be salary sacrificed to super, there’s no restriction on what can be paid. However, there are a number of things that should be considered when considering to salary sacrifice to super.
The amount salary sacrificed may:
- result in any excess salary scarified contributions being counted against an employee’s concessional (before-tax) contributions cap and attract additional tax. The concessional contributions cap limits the amounts that can be contributed to a super fund and be taxed at a concessional rate of 15%.
- attract Division 293 tax which is an additional tax that applies when a person’s adjusted taxable income. This includes concessional super contributions and other amounts is more than $250,000 in the financial year.
Benefits of salary sacrifice
The main benefit of salary sacrifice is that it can contribute towards an individual’s retirement savings over time through compounding returns. At the same time, it may reduce the overall amount of tax being paid on super contributions as well on a person’s pre-tax salary. This is because the amount salary sacrificed to superannuation is taxed at 15%, compared to if the amount was paid as salary and wages, the personal income tax rate would usually be higher. Since 1 July 2020, an additional benefit has come into play as employers who were using an employee’s salary sacrifice contributions to offset their superannuation guarantee liability will now have to pay those contributions, which will be based on an employee’s ordinary time earnings.
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