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Employer contributions

Section: 2.6

2.6 Employer contributions

Superannuation Guarantee

Australian law requires all employers to provide a minimum level of superannuation for their employees. For each quarter of a financial year, an amount equal to the prevailing Superannuation Guarantee (SG) rate of each eligible employee's ordinary time earnings (OTE) must be paid to a complying super fund. Employer contributions include all deductible employer super contributions made by an employer for the benefit of an employee and are taxed at 15%.

The SG payment rate is legislated to slowly increase to 12% by 1 July 2025 on the following schedule:

Financial year  SG rate (%)
 
2017-2018 9.5
2018-2019 9.5
2019-2020 9.5
2020-2021 9.5
2021-2022 10
2022-2023 10.5
2023-2024 11
2024-2025 11.5
2025-26 and future years 12

Salary sacrifice

Salary sacrifice is an arrangement between an employer and an employee, where the employee agrees to forgo receiving part of their salary or wages and agrees instead to have this amount contributed to their superannuation fund. Superannuation contributions made under a salary sacrifice arrangements are employer contributions and are taxed at the concessional rate of 15%.

Note:  Prior to 2020, an employer could use salary sacrificed super contributions to reduce both the earnings amount on which the super guarantee entitlement is calculated, as well as satisfying part of their compulsory SG contributions for an employee. However from 1 January 2020 this is no longer allowed. Salary sacrificed super contributions cannot:

  • reduce the ordinary time earnings on which an employer is required to calculate an employee's super entitlement
  • count towards the amount of super guarantee contributions that an employer is required to make

Employer contributions are taxed at 15% when paid to a complying superannuation fund. An employer is allowed a tax deduction for contributions paid to a superannuation fund on behalf of employees, as long as a number of conditions are satisfied.  The amount of the employer's tax deduction is generally not limited; however the employee may be subject to a penalty if their contributions exceed the concessional contributions cap.

Example of salary sacrifice strategy    
     
Andy, aged 50, earns $150,000 p.a. excluding superannuation. In July 2021, he enters into a salary sacrifice arrangement with his employer to sacrifice $12,500 p.a. into superannuation.  As his employer is required to pay SG of $15,000 (10% of his gross salary) Andy will contribute concessional contributions up to the maximum of $27,500 from July 2021.
     
2021/22 Before salary sacrifice arrangement After salary sacrifice arrangement
Salary                                             150,000                                          150,000
Salary sacrifice                                                      -                                              12,500
Employer SG contribution (10%)                                               15,000                                            15,000
Total super contribution                                               15,000                                            27,500
Reduced salary                                              150,000                                          137,500
Tax on taxable income (2021/22)                                               40,567                                            35,942
Medicare levy                                                 3,000                                              2,750
Total tax                                                43,567                                            38,692
Net income after tax                                             106,433                                            98,808

Andy will salary sacrificed $12,500, however, due to the drop in his taxable income, his take-home pay has only reduced by $7,625.

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Employer Awards

An employer may be required to make employer contributions in accordance with an industrial agreement. Employer contributions made in accordance with an industrial agreement can count towards the employer's SG obligation provided they are made in the relevant quarter or represent a pre-payment of SG contributions made within 12 months prior to the quarter.

Where contributions made under an industrial agreement are less than the employer's SG obligation for the quarter, the employer will need to make an employer contribution to cover any shortfall.

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

Last modified: Friday, July 2, 2021