If you’re a regular reader of SuperGuide, you may recall our September 2010 article Mr Shorten, here’s your superannuation to-do list outlining 16 of the major superannuation policies that Mr Shorten needed to focus on over the following 3 years.
SuperGuide promised to keep a scorecard of what Mr Shorten achieves, and what he doesn’t achieve in the superannuation space. Over the next 12 months, we will be publishing a series of articles under the theme of ‘That’s not fair!’ highlighting some of the policies that seem to have been ignored, or forgotten by the Government. This series of articles will also include inequities in the superannuation rules brought to our attention by SuperGuide readers.
Now, back to the issue of how the Government allows some employees to lose SG entitlements by salary sacrificing.
Before the current Government was elected in 2007, they promised to change the rules to ensure that individuals who choose to salary sacrifice do not lose Superannuation Guarantee entitlements. Nothing was done, and it appears that neither party is interested in correcting this injustice since the 2010 Federal election, or since the 2011 Federal Budget.
Today, it is still possible for an employee to lose Superannuation Guarantee entitlements when the employee boosts super contributions via a salary sacrifice arrangement. That’s not fair!
How can you lose SG by salary sacrificing?
For the benefit of readers who may not be familiar with the mechanics of salary sacrificing, 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 concessional (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. For more information on the tax-effectiveness of super contributions see the SuperGuide article Is super tax effective for those earning less than $37,000?
In some instances, when an employee enters into a salary sacrifice arrangement, he or she can potentially lose Superannuation Guarantee entitlements. The SG rules require your employer to pay the equivalent of 9% 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 (see table below). The financial impact becomes even greater the more that an employee salary sacrifices.
|Bill earns $50,000 plus super a year|
|Fair employer treatment||Unfair employer treatment|
|Salary for SG purposes||SG entitlements||Total package||Salary for SG purposes||SG entitlements||Total package|
|No salary sacrifice||$50,000||$4,500||$54,500|
|$5,000 salary sacrifice||$50,000||$4,500||$54,500||$45,000||$4,050||$54,050|
|$10,000 salary sacrifice||$50,000||$4,500||$54,500||$40,000||$3,600||$53,600|
Why can you lose some of your SG entitlements?
Unfortunately, the actual salary sacrifice arrangement that an individual may have in place is a private contractual arrangement that doesn’t involve the Australian Tax Office. The ATO is only interested if your employer hasn’t met their SG entitlements.
Ideally, the employee should still receive SG on the gross salary, or whatever was negotiated on commencement of employment. The mere fact that an individual has made a private decision to be pro-active about their retirement planning should not mean that he or she is then penalised by losing some SG entitlements.
This scenario absolutely stinks especially in circumstances where an employer has agreed to pay Superannuation Guarantee (SG) on a person’s full salary rather than your post-salary, and then ignored this agreement. If this even occurs, an individual would need to talk to their union (if they have one, and if a member) or a lawyer.
Warning: Anyone facing a cut in SG entitlements due to salary sacrificing should 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
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 in an award or agreement.