Q: Before commencement of salary sacrifice, my financial adviser told me to ask my boss if he would agree to pay the 9% on the full salary because, legally the employer only needs to contribute the 9% on the income I receive after the salary sacrifice. In short, my gross salary is $850 per week and I sacrifice $450 per week; from the other $400 he deducts the tax and I take home $341 net. It has been 3 years since I started this plan, and my boss has not contributed any money to my super and now I found out through the ATO that legally my boss doesn’t need to contribute any money to my super because my $450 that I sacrifice already covers his 9%, and according to the ATO, my salary sacrifice is called ‘employer’s contribution’. This means that not only I was misled by my adviser, my boss and the loophole of the ATO or whoever made that legal, I have been living on $341 a week for 3 years to help my boss to save 9% on $850 per week or a total of $11,900 in 3 years. I will be 65 in June 2010. Is this legal? What can I do about this? Your help in this matter would be greatly appreciated.
Trish’s response: For the benefit of other readers, I will first explain the rules that you are referring to in your question.
A salary sacrifice arrangement is when an employee arranges with their employer for a portion of salary to be contributed to their super fund from before-tax salary, thus reducing taxable income. The contribution is treated as an employer contribution, which means the employer claims a tax deduction for the contributions, and the employee pays less income tax. The salary-sacrificed contributions are hit with a contributions tax of 15% upon entry into the super fund.
Note: Making before-tax super contributions is not generally tax effective if you’re paying 15% income tax or less on your personal income, although salary sacrificing is often used to reduce taxable income to a level where 15% or less tax is payable.
In some instances, when an employee enters into a salary sacrifice arrangement, he or she can potentially lose Superannuation Guarantee (SG) entitlements. The SG rules require your employer to pay the equivalent of 9 per cent of your wages or salary into your super fund at least every three months, although some employers pay SG entitlements monthly or fortnightly.
The equivalent of 9% of your salary can mean different amounts depending on how, or if, you negotiate a salary package. For example, a person who earns $50,000 will receive $4,500 in SG contributions. It is possible in some circumstances that if this person salary sacrifices, say, $5,000, then he may only receive SG contributions on the lower salary of $45,000. His employer’s annual SG contributions will then be $4,050, that is, $450 less than the original arrangement.
Yes, this scenario absolutely stinks and if your employer agreed to pay your Superannuation Guarantee (SG) on your full salary rather than your post-salary, and then ignored this agreement, you may have to talk to your union (if you have one, and you’re a member) or a lawyer.
Unfortunately, the actual salary sacrifice arrangement that you have in place is a private contractual arrangement that doesn’t involve the Australian Tax Office. The ATO is interested if your employer hasn’t met their SG entitlements, and based on your discussions with the ATO, it seems that your employer has met the SG requirements. I cannot comment specifically on your employer’s SG obligations however, so you probably need to chat to your employer, again with the ATO (call 13 10 20), and seek any further assistance if you think your employer has done the wrong thing.
Before the current Government was elected, they promised to change the rules to ensure that individuals who choose to salary sacrifice do not lose SG entitlements, but this promise has been broken. Nothing has been done.
I would also be checking up on annual leave, sick leave and long service leave entitlements and whether they have been affected by the salary sacrificing arrangement. You need to negotiate with your employer to protect your existing entitlements or at least be aware of the full impact (if any) of any salary sacrifice arrangement, especially on your annual leave, sick leave and long service leave entitlement.
Tips when negotiating salary sacrificing arrangements
For the benefit of all readers, before negotiating a salary sacrifice arrangement consider the following:
- Confirm your superannuation arrangement with your employer before signing any employment agreements. If you negotiate a salary, your salary amount often includes your employer’s superannuation contribution. Your employer then usually calculates SG on the basis of the cash component of your salary. Some industrial awards explicitly state that SG contributions should be calculated on your full salary, before deducting any salary sacrifice amounts.
- If large amounts of money are involved it’s worth getting tax advice from your accountant.
- Any salary sacrifice arrangement that you agree to can only relate to future salary, not past earnings.
- You can salary sacrifice performance bonuses if the agreement regarding your salary sacrifice was entered into before you became entitled to your performance bonus.
- If you’re subject to an industrial award, or workplace agreement, you can’t reduce your salary below the minimum wage set an award or agreement.
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