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Salary sacrifice contributions

Section: 2.10

2.10 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.

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.

Super guarantee

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. An employee may salary sacrifice an amount in addition to the SG contributions they receive from their employer, as long as they do not exceed the concessional contributions cap for the relevant financial year.

Financial year  SG rate (%)
 
2017-2021 9.5
2021-2022 10
2022-2023 10.5
2023-2024 11
2024-2025 11.5
2025-26 and future years 12
 
Financial year Concessional contributions cap 
1 July 2021 and later years  $27,500
1 July 2017 - 30 June 2021 $25,000

Superannuation contributions

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 the employee's spouse are a fringe benefit.

When entering into salary sacrifice arrangements there are some implications that could affect an employee:

Considerations
 
  • Income tax will be paid 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. Hence, the employer will claim a tax deduction.
  • 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)

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 counts towards a range of taxation and social security benefits

Salary sacrificed 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:

Salary sacrifice contributions may affect the following:
 
  • 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

Example: Salary sacrifice arrangement

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.

Example
Concessional Contribution Cap 2021/22                                                                    27,500  
Salary excluding super                                                                 150,000
Super guarantee (SG) 10%                                                                    15,000
  Before salary sacrifice arrangement After salary sacrifice arrangement
 
Salary                                                                 150,000                                                                                                            150,000
Salary sacrifice                                                                      N/A                                                                                                                     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

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

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: Thursday, July 1, 2021