Salary sacrificing and super: 10 facts you should know

Salary sacrificing, by making before-tax superannuation contributions, is a popular strategy for employees on middle-to-high incomes. The deal is that you increase your superannuation balance (and pay 15% contributions tax) while reducing the amount of income tax payable (up to 46.5%) on your salary or wages.

Before you decide to arrange a salary sacrifice arrangement using superannuation contributions, chat to your accountant about the tax implications, and ensure you do not lose out financially on your employment package.

1. How does salary sacrificing work?

Under a superannuation salary sacrifice arrangement, your employer can make additional super contributions when you arrange for some of your pre-tax salary to be paid into your super fund. Your salary for tax purposes is then reduced while the additional contributions are treated as employer contributions. As employer contributions, you don’t pay income tax on these amounts (although ‘contributions’ tax of 15% is deducted from the contribution, and potentially contributions tax of 30% if you earn more than $300,000 – see Super Fact No 3) and your employer receives a tax deduction.

2. A salary sacrifice contribution is a concessional contribution

Any super contributions made under a salary sacrifice arrangement are treated as concessional contributions and need to be counted towards your concessional contributions cap (see Super Fact No 8). The concessional contributions cap for the 2013/2014 year is $25,000 for individuals under the age of 60, and $35,000 for individuals aged 59 years or over on 30 June 2013 (special work test rules apply for Australians aged 65 years and over, and voluntary contributions are not permitted for Australians aged 75 years and over).

Note: For the 2014/2015 year, the concessional contributions cap is $30,000 for individuals under the age of 50, and $35,000 for individuals aged 49 years or over on 30 June 2014.

3. Two special cases for low-income earners and high-income earners

I have some good news, and I have some bad news:

4. Your employer may not agree to salary sacrifice

Salary sacrificing is a voluntary arrangement between an employee and employer. An employer does not have to consent to putting such an arrangement in place. If your employer does not consent to such an arrangement then you will not be able to salary sacrifice. Even when your employer refuses to allow you to salary sacrifice super contributions, your employer is still required to make compulsory Superannuation Guarantee contributions on your behalf.

5. Get your arrangement in writing, and have it signed before the contributions commence

A salary sacrifice arrangement is a contractual arrangement between you and your employer and for your own protection, a written agreement ensures you can confirm the terms of the agreement, if there is any confusion. You can even include the timing of the payment of the super contributions in the agreement. Will it be paid at the same time as you receive your weekly, fortnightly or monthly pay, or does the employer intend to pay the super contributions less regularly than your regular pay? For example, some employers pay compulsory Superannuation Guarantee contributions quarterly, and an employer may decide to delay direction of your voluntary super contributions until the business pays SG contributions. Always check the timing of super contributions.

Note: Historically, if you were subject to an industrial award or workplace agreement, you couldn’t reduce your salary below the minimum wage set in an award or agreement. According to a 2010 Fair Work Australia court case, it is now lawful, via a salary sacrifice arrangement, to reduce your salary below the minimum wage set under an award or agreement. In a 27 January 2011 PwC Australia LegalTalk Alert, PwC report that Fair Work Australia Vice President Lawler said “a salary sacrifice arrangement entered into consistently with the FW Act will need to have been genuinely assessed as advantageous by the employee and genuinely agreed to. Such an arrangement cannot properly be seen as undermining the safety net because the employee still derives the full benefit of the minimum award rate of pay albeit that it better suits the employee to receive part of the benefit of the minimum award rate of pay in employer payments to a third party on the employee’s behalf.” PwC advise that employers should ensure that any salary sacrifice arrangements are authorised in writing by the relevant employee and genuinely assessed as advantageous and agreed to by the employee. In such circumstances, where an employee is planning to salary sacrifice below the minimum wage, especially if he or she is considering a 100% salary sacrifice, it would probably be wise for both parties to get some advice on the matter.

6. Do you have a pretend salary sacrifice arrangement in place?

For the 2013/2014 year, the law requires an employer to pay the equivalent of 9.25% of an individual’s salary into a super fund under the Superannuation Guarantee (SG) laws. A person’s salary (for the purposes of SG) is generally ordinary hours of work although salary also includes over-award payments, and any shift loading and commissions, but not overtime.

Note that ‘the equivalent of 9.25% of your salary’ can mean different SG amounts depending on how, or if, you negotiate a salary package. Depending on your contract or award, if you earn, say, $80,000 a year, this salary amount may include your SG entitlement or you may receive 9.25% SG in addition to the $80,000 salary. If the $80,000 includes SG entitlement then your cash salary is $73,230 and your SG entitlement is $6,770. If your SG entitlement is in addition to your $80,000 salary amount, then your super fund receives $7,400 in SG contributions, and your total package works out to be $87,400.

A little word like ‘including’ can make a huge difference financially.

Note: For the 2014/2015 year, the SG rate increases to the equivalent of 9.5% of your salary.

7. Don’t lose your SG entitlements

A relatively unknown loophole in the SG rules enables an employer (if they’re nasty) to cut an individual’s SG entitlements when an employee reduces their taxable salary via a salary sacrificing arrangement. If an employer cuts an individual’s SG entitlements when the employee enters a salary sacrifice arrangement, this in effect cuts the employee’s total salary package, unless the employee has a written contract specifying a total amount.

For example, say, Joan earns $90,000 a year plus SG. Joan can expect to receive $8,325 in SG contributions taking her total entitlements to $98,325. Joan has been chatting to her adviser who suggests that a tax-effective way to accumulate more super is to salary sacrifice. Instead of paying 38.5% tax (37% plus 1.5% Medicare levy) on any income that exceeds $80,000 (for the 2013/2014 year), Joan can divert money to her super fund, which means 15% tax is deducted from the before-tax super contributions rather than 37% income tax if she takes the salary as cash. Any taxable income below $80,000 but above $37,000 is taxed at 32.5 cents in the dollar plus Medicare levy (for the 2013/2014 year).

Note: If Joan decides to salary sacrifice $20,000 into her super fund, it is not automatic that her SG entitlement will continue to be based on her original salary amount. She may only receive SG contributions based on the lower cash salary of $70,000. Joan’s employer’s annual SG contributions may well then be $6,475 (9.25% of $70,000) rather than $8,325 (9.25% of $90,000), that is, $1,850 less than the original arrangement. This can mean tens of thousands of dollars less in super over several years.

A better and fairer result would be to retain the original SG entitlements. When the ALP was in opposition, they announced that they intended to change the laws so that an employee’s SG entitlement would be based on an individual’s salary before the salary sacrifice arrangement takes effect. Unfortunately, nothing happened while the ALP were in government. The Liberals have been silent on whether they intend to fix this issue, and meanwhile, nothing has happened to protect workers from losing SG when choosing to reduce taxable salary via a salary sacrificing arrangement.

8. Watch your contributions cap

Your salary sacrificed contributions and your employer’s Superannuation Guarantee contributions and any additional employer contributions count towards your concessional (before-tax) contributions cap.

If you’re under the age of 60, you can make concessional contributions worth up to $25,000 each year (for the 2013/2014 year), and if you were 59 years or older on 30 June 2013, then you can make concessional contributions worth up to $35,000, before you have deal with excess contributions issues. Your concessional contributions will be subject to a maximum of 15% tax ( or 30% tax if you earn more than $300,000), which generally means such a strategy is tax-effective only for employees paying more than 15 cents in the dollar income tax.

Note: See Super Fact No 3 earlier in the article for the superannuation tax refund applicable to those who earn less than $37,000, and for an explanation of the extra tax on higher income earners.

If you do exceed your concessional cap, the excess contributions also count towards your non-concessional (after-tax) contributions cap. Exceeding your concessional cap can mean paying penalty tax, or withdrawing the excess contributions and paying income tax on that amount.

Tip: Check when your salary-sacrificed contributions are to be paid into your super fund because even though you may receive your salary in one financial year, the salary-sacrificed contributions may be paid at a later date, and in a different financial year, potentially causing you excess contributions issues, and potentially extra super tax, or extra income tax.

9. Your salary sacrifice agreement can only relate to future income

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.

Warning: Some employers use an external party to arrange salary sacrifice agreements and the external party charges a flat fee for every transaction. The costs can add up very quickly if your employer plans to make small super contributions on a regular basis.

10. Where do I go for more information on salary sacrificing?

The following information or advisory sources may help you:

  • ATO website (www.ato.gov.au/super).
  • Your super fund. Check out your super fund’s website for information, and the forms required for salary sacrificing. Many super funds now offer a limited advice service (intra-fund advice) on certain topics such as salary sacrificing and changing investment options.
  • Your HR department/employer. If you work for a large employer it is likely they have salary sacrifice arrangements in place for other employees. If you work for a smaller employer, they may or may not have experience with salary sacrificing.
  • Your accountant. If you plan to make substantial salary sacrifice contributions it is worthwhile getting tax advice on the strategy.

You can also check out other articles about salary sacrificing on the SuperGuide website here.

© Copyright Trish Power 2009-2014

Copyright for this article belongs to Trish Power, and cannot be reproduced without express and specific consent.

IMPORTANT: SuperGuide does not provide financial advice. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Readers need to seek independent advice about their personal circumstances.

Comments

  1. Peter Grace says:

    Fair Work Australia has made a determination that an employee can salary sacrifice as much as they want (even all their pay if the employer agrees) and that the old award minimum no longer applies. see http://www.pwc.com.au/legal/assets/legaltalk/LegalTalk-Alert-SalarySacrificing-27Jan11.pdf

  2. There is an even worse trap that “horrible employers” may use under item 7. Because the employer is paying Joan’s $20,000 salary sacrificed amount as an employer contribution, the employer has effectively already met their 9.25% SG obligation on her $70,000 salary so doesn’t have to pay anything further.

  3. I think there’s a typo here:
    “Note: For the 2014/2015 year, the concessional contributions cap is $30,000 for individuals under the age of 50, and $35,000 for individuals aged 49 years or over on 30 June 2014.”

    49 should be 59.

    • Hi Jim
      Thanks for your comment. The good news is that the $35,000 concessional cap is for those who are 49 years and over for the 2014/2015 year.
      See ATO link: https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?page=2
      And here is the legislative basis:
      292-20 Concessional contributions cap for older Australians—$35,000

      (1) Despite section 292-20 of the Income Tax Assessment Act 1997, your concessional contributions cap is $35,000:

      (a) for the 2013-2014 financial year—if you are 59 years or over on 30 June 2013; or

      (b) for the 2014?2015 financial year or a later financial year—if you are 49 years or over on the last day of the previous financial year.

      Note: This amount is not indexed.

      (2) This section does not apply to a financial year for which the concessional contributions cap worked out under section 292?20 of the Income Tax Assessment Act 1997 is $35,000 or more.

      (3) This section does not apply for the purposes of subsection 292?85(2) of that Act.

      Here is the link for this extract: http://www.comlaw.gov.au/Details/C2013A00082
      I appreciate you contacting me, because it is always best to check
      Regards
      Trish

  4. It is a great website, but I can not see any responses for peoples comments – do you reply to them?

  5. I was impressed with your guide, however my husband has just been employed after searching for work for over 6 months we believe due to his age although this cannot be legally confirmed – he is 58 and has started to salary sacrifice $300 (we have a SMSF) and the company is reduciing his SG payments by that amount. They are also paying his Salary sacrifice amount at the end of the quarter, we sent them a letter with the salary sacrifice and they said this is the way they do it. I have just sent an email to my local government to encourage the law to change I am not sure what else to do, we feel used and although we feel this is still a better move he will be losing a minimum of $2500 + a year
    Disappointed and disillusioned

  6. I am a mature age worker working as a fundraiser aged 73 working 25-30 hrs p wk .My employer agreed to pay super into my super fund ,however as I am approaching 75 years of age and wish to continue working as above , how would salary sacrifice work for me. Or is there any other way my emploer can contribute to my super fund,and still receive tax deductions?
    Thank You
    Norman

  7. I have just turned 65 and still working full time. Am I still able to salary sacrifice?

  8. I have been a full time wages employee for the past 17 years and wished to start salary sacrificing.
    I am on an hourly rate of $33-50 based on a 38 hour week.
    I nominated $150 a week to salary sacrifice and this was put into place.

    I need clarity on the following:-
    My hourly rate dropped by $3-95 an hour for me to sacrifice $150- a week which equates to $29-55.
    In this week I also worked 10 hours overtime at time and half which the company then also paid me at a rate of $29-55 x 1.5 which equals $44-32 instead of $50-25 which should be $33-50 at time and a half.

    As we have been advised from our accountant, financial adviser and stock broker who all have said this is not right could you please let me know the correct calculations the company should be using. I have spoken to the HR payroll person and they have said they will continue to calculate it this way until they are given proof this is not correct.

    Thank you and regards
    JAMIE

  9. Hi Trish

    Quick questions:
    1. Does it mean that Joan in your example above (points 7 & 8 of Salary Sacrificing: 10 Super Facts You Should Know) will be hit with the penalty tax given the concessional contribution is above $25K, i.e. $8.1K plus $20K)?

    2. Should the nonconcessional contribution be sourced from after tax “income” only, or could it be sourced from existing wealth (or assets)?

    Kind Regards
    Alf

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