Now that we are well into the third financial year of a higher Superannuation Guarantee rate of 9.5%, you can expect some difficult conversations between employers and employees in coming months as some salaried employees discover that the Superannuation Guarantee (SG) increase of 0.25%, which took the SG rate to 9.5%, will not benefit those employees on fixed remuneration packages. The SG rate of 9.5% has applied since the start of the 2014/2015 financial year, and remained at 9.5% for the 2015/2016 year, and remains at 9.5% for the 2016/2017 financial year.
As occurred previously (when the SG rate increased from 9% to 9.25% from the start of the 2013/2014 year), I have heard that some employers (including some very large employers) are ignoring the spirit of the law behind the Superannuation Guarantee increase, and choosing to absorb the SG increase within existing salary packages, with the effect of reducing take home pay.
I have received several emails (but not as many as I received relating to the previous three financial years) from both employees and employers asking for clarification about this issue, and I have some good news and some bad news.
The good news is that the SG rate increased to 9.5% effective since July 2014, and the law requires an employer to pay the equivalent of 9.5% of an individual’s ordinary time earnings 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.
The bad news is that the ‘the equivalent of 9.5% of your ordinary time earnings’ 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, $60,000 a year, this salary amount may include your SG entitlement or you may receive 9.5% SG in addition to the $60,000 salary.
If the $60,000 INCLUDES your SG entitlement then your cash salary is $54,795 and your SG entitlement is $5,205. If your SG entitlement is in addition to your $60,000 salary amount, then your super fund receives $5,700 in SG contributions, and your total package works out to be $65,700.
I have received emails from readers who are subject to total remuneration packages, and where employers have notified them that the total package will remain the same as before, and any increase in Superannuation Guarantee contributions will mean less take-home cash salary. One reader received the first round of SG increase of 0.25% (increase from 9.0% to 9.25% for the 2013/2014), but had been told that the 2014/2015 increase (from 9.25% to 9.5%) and any future SG increases, would be absorbed within his existing total remuneration package. In these situations, the SG increase is actually funded by the employee rather than the employer.
Is such an arrangement legal? Unfortunately it is, although any employer opting to take this approach must ensure that the employee or employees involved are truly subject to a fixed salary package, and not eligible for an annual salary PLUS Superannuation Guarantee.
Employers and employees should check employment arrangements and ensure the right level of SG is paid for each employee, and that the SG rules are followed and contractual obligations are met.
Note: Superannuation Guarantee contributions must be paid into an employee’s super fund at least quarterly, and by the 28th day following the end of the quarter. Some employers have signed agreements with super funds to pay SG contributions monthly, while some employers pay SG entitlements more frequently. For more information on the SG increase see SuperGuide article Superannuation Guarantee rate remains at 9.5% for 2016/2017 year, and for the 2017/2018 year.
Dropping the ball on SG entitlements for packaged employees
The sticky issue of who actually pays for the regular increases in SG entitlements over the next few years when a salary package is in place, is not unlike the potential SG issue when an employee negotiates a salary sacrifice arrangement.
Before the former ALP 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 Liberal party were re-elected in the 2016 Federal Election.
Today, it is still possible for an employee to lose Superannuation Guarantee entitlements when the employee boosts super contributions via a salary sacrifice arrangement (although there is a back-door way to tackle the issue of lower SG entitlements when salary sacrificing – see later in the article).
How can you lose SG by salary packaging, or salary sacrificing super?
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 (for back ground information on salary sacrificing, see SuperGuide article https://www.superguide.com.au/boost-your-superannuation/salary-sacrificing-super-facts.
The salary-sacrificed contributions are hit with a contributions tax of 15% upon entry into the super fund. If you earn more than $300,000 a year, then your salary sacrificed contributions may be hit with an additional 15% tax, taking the total tax bill on the super contribution to 30% (note that from 1 July 2017, the income threshold for the additional 15% tax will be changed to $250,000 – for more information see SuperGuide article Double contributions tax for more high-income earners).
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 income tax is payable. Note that an income tax rate of 19% is payable on taxable income above $18,200 (for more information on income tax rates, including the Low Income Tax Offset, see SuperGuide article Australian income tax rates for the 2015/2016 and 2016/2017 years and for information on the relationship between income and super, see SuperGuide article Super for beginners, part 25: Is super worthwhile if I’m 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. Since 1 July 2014, the SG rules require your employer to pay the equivalent of 9.5% of your wages or salary (ordinary time earnings) into your super fund at least every three months, although some employers pay SG entitlements monthly or fortnightly.
The equivalent of 9.5% of your salary can mean different amounts depending on how, or if, you negotiate a salary package. For example, a person who earns $70,000 can receive $6,650 in SG contributions. It is possible in some circumstances that if this person salary sacrifices, say, $10,000, then he may only receive SG contributions on the lower salary of $60,000. His employer’s annual SG contributions will then be $5,700, that is, $950 less than the original arrangement (see table below). The financial impact becomes even greater the more that an employee salary sacrifices, and even greater if the employer assumes that the extra 0.25% (from 9.25% to 9.5% SG) in SG entitlements is sourced from an employee’s existing package (refer earlier in the article).
Bill earns $70,000 PLUS super a year
|Fair employer treatment||Unfair employer treatment|
|Salary for SG purposes||SG entitlements (9.5%)||Total package||Salary for SG purposes||SG entitlements (9.5%)||Total package|
|No salary sacrifice||$70,000||$6,650||$76,650||$6,650||$76,650|
|$10,000 salary sacrifice||$70,000||$6,650||$76,650||$60,000||$5,700||$75,700|
|$20,000 salary sacrifice||$70,000||$6,650||$76,650||$50,000||$4,750||$74,750|
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 sacrifice earnings, and then ignored this agreement. If this ever 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.
Note: The July 2014 increase in SG, which also applies for the 2016/2017 and 2015/2016 years, may affect your take-home pay if you have a fixed salary package in place, and your employer adjusts the cash component of your package to pay the extra SG amount.
Super alert! From 1 July 2017, employees will be able to make tax-deductible super contributions, which means if you have a mean employer who reduces your SG entitlements when you salary sacrifice, then you may consider making tax-deductible super contributions rather than entering a salary sacrifice arrangement, although there will be more paperwork (for more information, see SuperGuide article Employees can make tax-deductible super contributions from July 2017).
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.
- Check with your employer about how the SG increase of 0.25% (since 1 July 2015, and also applicable for 2015/2016 and 2016/2017 years) is to be paid, and confirm how much SG will be paid into your super account.
- 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 usually can’t reduce your salary below the minimum wage set in an award or agreement, although it may depend on the award.