Getting money into super
Salary sacrifice contributions
Under TR 2001/10 an effective salary sacrifice arrangement is an arrangement under which an employee agrees to forego part of their total remuneration that they would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer providing benefits of a similar value.
The sacrificed salary or wages do not form part of the employee's assessable income. Any superannuation contributions made under an effective salary sacrifice arrangement will constitute concessional contributions of the employee.
|Ineffective salary sacrifice arrangements
Where an existing agreement in respect of entitlement that have already been earned will be an ineffective salary sacrifice arrangement.
Under an ineffective salary sacrifice arrangement, the sacrifice wage or salary will form part of the employee's assessable income and will be taxed accordingly. Any superannuation contributions made under an ineffective salary sacrifice arrangement will constitute non-concessional contributions of the employee.
Under an effective sacrifice arrangement where the employee enters into an agreement between an employer to forego part of their salary into a complying superannuation fund, the contributions are considered to be employer contributions. These are not fringe benefits when paid for an employee by an employer to a complying super fund.
Any super contributions made for the benefit of an associate, such as employee's spouse are a fringe benefit.
When entering into salary sacrifice arrangements there are some implications which could affect an employee:
- Pay income tax on the reduced salary or wages
- Employer may be liable to pay FBT on the non-cash benefits provided
- Employer may be required to report certain benefits on their income statement or payment summary
- The salary sacrificed super contributions are taxed in the super fund and are classified as employer super contributions, rather than employee contributions
- The salary sacrifice super contributions cannot be used to reduce the minimum amount of SG the employer needs to pay for the employee (from 1 January 2020).
Fringe benefits applies where a non-cash benefit is provided to an employee (or an employee's associate) in respect of the employment of the employee.
Fringe benefits can include:
- Property (including goods, real property such as land and buildings, and shares or bonds)
- Expense payments (such as the payment of home loans, school fees, child care costs and home phone costs)
The following examples of fringe benefits (stated above) may give rise to a Fringe Benefit Tax (FBT) liability which is paid by an employer to an employee or an associate of the employee. The FBT rate is equal to the top marginal rate plus Medicare levy. The current FBT rate is 47% and is levied on the taxable value of fringe benefits provided in the FBT year which runs from 1 April 2020 to 31 March 2021)
The reason for FBT is that packaged benefits or expenses are equivalent to wages and salary and so should be subject to tax at the marginal tax rate of the employee. However, FBT is levied on employers at the top marginal rate of tax, although employees receiving the benefit may be on a lower tax rate.
There are certain benefits which are exempt from fringe benefits tax (FBT). The following work-related items commonly provided in salary sacrifice arrangements are exempt benefits:
- A portable electronic device
- An item of computer software
- An item of protective clothing
- A briefcase
What are the benefits of salary sacrifice arrangements?
Under the salary sacrifice arrangement to a complying superannuation, an employee forgoes part of their wage or salary for employer superannuation contributions. This effectively reduces the assessable income and taxable income of the employee.
The additional employer superannuation contributions forms part of the taxable income of the superannuation fund and is generally taxed at maximum rate of 15% (commonly called 'contribution tax').The low income super tax offset may reduce the tax rate for qualifying individuals with low income. Any additional 15% tax (Division 293 tax) may apply to concessional contributions made by employees with income exceeding $250,000.
The main benefit of such a salary sacrifice arrangement is the immediate tax savings (including Medicare Levy) generated by the sacrificed amount.
Working out the tax benefits of salary sacrifice
When determining how much wage or salary should be sacrificed into superannuation, consider what marginal tax rate would apply to each extra dollar that could be sacrificed and the tax implications of these benefits when entering (ie contribution tax, low and Division 293 tax) and exiting the superannuation system.
Are there any limits to the amount which can be salary sacrificed?
If there are no limits specified in an industrial law, award, workplace agreement or employment contract, there is no limit to the amount which can salary sacrificed.
However, employees should consider the following:
- Will the amount cause the employee to exceed their concessional (before-tax) contributions cap and attract additional tax
- Will the amount attract Division 293 tax - this occurs when employee's income (including concessional super contributions and other components) is more than:
- $300,000 in one year, before 1 July 2017
- $250,000 in one year, from 1 July 2017
What entitlements may be salary sacrificed?
Employees may salary sacrifice future earnings. Future earnings are salary or wages which the employee has not earned the entitlement. Leave payments and bonuses may be salary sacrificed.
Salary sacrifice count towards for a range of taxation and social security benefits
Salary scarified superannuation benefits are included in the income definition used to determine eligibility for a range of taxation and social security benefits. Any income definition that includes 'reportable employer superannuation contributions' captures salary sacrifice to superannuation.
The following include salary sacrifice contributions, which are taken into account in determining if they are eligible for the following taxation and social security measures:
- government co-contribution when they make contributions
- low income superannuation tax offset
- tax offset when they make contributions for a spouse
- income support payments
- low income health card
- Commonwealth Seniors Health Card
Under Superannuation Guarantee (SG) legislation the employer is required to provide a minimum level of superannuation support based on the employee's ordinary time earnings (OTE). Salary sacrifice reduces an employee's wage or salary, therefore may reduce the employee's OTE.
|Note: From 1 January 2020, a member's salary sacrifice contributions will no longer be considered super guarantee contributions from their employer. For instance, if they elect to salary sacrifice 5% into their super, their employer will still be required to pay 9.5% or more of their ordinary time earnings base, including the salary sacrifice amount, into their super to avoid the super guarantee charge.|
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: Wednesday, November 4, 2020