Salary sacrifice and super: A guide for employees and employers

Note: Since 1 July 2017, Australians with an adjusted taxable income of more than $250,000 will pay 30% tax on super contributions (before July 2017, the income threshold was $300,000), rather than only 15% contributions tax. Since 1 July 2017, the top marginal income tax rate dropped to 45% (from 47%) plus 2% Medicare levy.

Before you decide to embark on a salary sacrifice arrangement using superannuation contributions, chat to your accountant about the tax implications of such a strategy or a financial adviser about the overall implications of such a strategy, and ensure you do not lose out financially on your employment package.

Important: Since 1 July 2016, the type of superannuation advice that accountants can provide (in particular, on SMSF matters) has changed. For more information, see SuperGuide article SMSF advice: Is your accountant still allowed to help your fund?

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 an additional 15% tax if your adjusted taxable income is more than $250,000 – see Super Fact No 3). Your employer receives a tax deduction for the super contribution, just as the employer would have received a deduction when paying you cash salary.

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).

Super alert! Since 1 July 2017, the annual concessional contributions cap dropped to $25,000 for all ages (see SuperGuide article Cut to concessional contributions caps: the back story). For the 2017/2018 year, and for the 2018/2019 year, the concessional contributions cap is $25,000 for all age groups.

Special rules apply for Australians aged 65 years and over (see SuperGuide article What are the super and retirement rules for over-65s?), and voluntary contributions are not permitted for Australians aged 75 years and over (see SuperGuide article Super contributions beyond the age of 75).

Note: Before July 2017, the concessional contributions cap applicable to you depended on your age. For the 2016/2017 year, the concessional cap was $30,000 for anyone aged 48 years or younger on 30 June 2016, and $35,000 for anyone aged 49 years or older on 30 June 2016.

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

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

• If you earn less than $37,000 a year, you may have your contributions tax refunded. For more information on the Low Income Superannuation Tax Offset (formerly known as the Low Income Super Contribution) see the SuperGuide article LISTO: Super tax refund for lower-income earners).
• Since 1 July 2017, if your adjusted taxable income is greater than $250,000, then the contributions tax on your concessional contributions, such as salary sacrifice and Superannuation Guarantee contributions, is 15% PLUS an additional tax of 15%, taking the total tax on your concessional contributions to 30%. Note that the $250,000 threshold was expanded from the pre-July 2017 income threshold of $300,000, which means more Australians are now paying higher taxes on concessional super contributions (for more information see SuperGuide article Double contributions tax for more high-income earners).

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 for his or her employee. 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.

Note: Since 1 July 2017, employees in such circumstances may have another option. All individuals under the age of 75 are able to claim tax deductions for personal super contributions, subject to the concessional contributions cap, and taking account of previously-made super contributions for a financial year. Such a measure assists Australians who work for employers who don’t accommodate salary sacrificing. For more information on the post-July 2017 change to the tax-deductible contributions rules, see SuperGuide article Employees can now make tax-deductible super contributions (since July 2017).

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. For your own protection, a written salary sacrifice 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 reported 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 advises 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 2018/2019 and for the 2017/2018 year (as was the case for the 2016/2017, 2015/2016 and 2014/2015 years), the law requires an employer to pay the equivalent of 9.5% of an individual’s ordinary time earnings (typically wages or salary) into a super fund under the Superannuation Guarantee (SG) laws. A person’s ordinary time earnings (for the purposes of SG) is generally ordinary hours of work although it can also include over-award payments, and any shift loading and commissions, but not overtime.

Note that the equivalent of 9.5% of your wages or 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 9.5% SG in addition to the $80,000 salary. If the $80,000 includes your SG entitlement then your cash salary is $73,059 and your SG entitlement is $6,941. If your SG entitlement is in addition to your $80,000 salary amount, then your super fund receives $7,600 in SG contributions, and your total package works out to be $87,600.

A little word like ‘including’ can make a huge difference financially. For more information about this issue, see SuperGuide article Superannuation Guarantee: Many Aussies miss out on SG increase.

Note: For the 2018/2019 and 2017/2018 years, and the 2016/2017, 2015/2016 and 2014/2015 years, the SG rate is 9.5% of ordinary time earnings. For the 2013/2014 year, the SG rate is 9.25% of ordinary time earnings, and for the 2012/2013 year and earlier financial years, the SG rate is 9%.

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 $95,000 a year plus SG. Joan can expect to receive $9,025 in SG contributions taking her total entitlements to $104,025. 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 39% tax (37% plus 2% Medicare levy) on any income that exceeds $87,000 (for the 2018/2019 year, or for the 2017/2018 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 $87,000 but above $37,000 is taxed at 32.5 cents in the dollar plus Medicare levy (for the 2018/2019 or 2017/2018 year).

Income tax alert! In the 2018 Federal Budget, the federal government announced proposed tax cuts (not yet law) that will alter the figures of the example above for the 2018/2019 year, due to the proposed introduction of a Low and Middle Income Tax Offset (LAMITO). For more information about LAMITO and other proposed tax cuts, see SuperGuide section Low and Middle Income Tax Offset (LAMITO)).

Note: If Joan decides to salary sacrifice $15,000 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 $80,000. Joan’s employer’s annual SG contributions may well then be $7,600 (9.5% of $80,000) rather than $9,025 (9.5% of $95,000), that is, $1,425 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 in the mid-2000s, 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, and the Liberals were silent for a long time. The good news is that the Liberals have now submitted legislation (at the time of writing not yet law) to change the super rules, so employers can no longer take advantage of this loophole to legally ‘rip off’ employees who choose to reduce taxable salary via a salary sacrificing arrangement.

Note: Since 1 July 2017, employees who have been losing SG entitlements when salary sacrificing, may have another option. The Coalition government has changed the super rules to allow all individuals under the age of 75 to claim tax deductions for personal super contributions, subject to the concessional contributions cap. For the 2016/2017 financial year however, employees were not able to make tax-deductible super contributions unless they passed a 10% test (see SuperGuide articles Employees can now make tax-deductible super contributions (since July 2017) and Tax-deductible super contributions: No longer need to meet 10% income test.

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.

Note: For the 2017/2018 year and 2018/2019 year, the concessional contributions cap has dropped to $25,000 for all age groups (see SuperGuide article Cut to concessional contributions caps: the back story). For the 2016/2017 year, if you were aged 48 years or under on 30 June 2016, you could make concessional contributions worth up to $30,000 (for the 2016/2017 year). If you were 49 years or older on 30 June 2016, then you could make concessional contributions worth up to $35,000 for the 2016/2017 year, before you had to deal with excess contributions issues.

Your concessional contributions are subject to a maximum of 15% tax (or 30% tax if your adjusted taxable income is more than $250,000 for the 2017/2018 year, or for the 2018/2019 year), which generally means such a strategy is tax-effective only for employees paying more than 15 cents in the dollar income tax.

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

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.

Warning: If you do exceed your concessional cap, the excess contributions can also count towards your non-concessional (after-tax) contributions cap, that is, if you choose not to withdraw your excess concessional contributions. Exceeding your concessional cap can mean paying higher tax, although you do have the option to withdraw excess contributions rather than pay penalty tax. For more information on the excess contributions rules, see SuperGuide article Excess contributions rules: A quick summary.

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.

Where do I go for more information on salary sacrificing?

You can check out other articles about salary sacrificing and other concessional contributions on the SuperGuide website. For starters, here’s a sample of helpful articles:

• Super concessional (before-tax) contributions: 2018/2019 survival guide
• Concessional contributions cap: A quick guide (10 Q&As)
• Employer super contributions: SG rate 9.5% for 2017/2018 year
• Superannuation and employees: 10 facts about your super entitlements
• Employees can now make tax-deductible super contributions (since July 2017)
• Double contributions tax for more high-income earners

The following information or advisory sources may also help you:

• ATO website (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, noting that an accountant can provide tax advice (if a registered tax agent), but may need an Australian Financial Services licence to provide certain super-related advice (see SuperGuide article SMSF advice: Is your accountant still allowed to help your fund?).