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Allowing your employees to sacrifice some of their salary and wages into their super account can help them manage their tax bill, increase their retirement savings and boost their engagement with your business.
But there are important rules you need to follow if you want to create an effective salary sacrifice arrangement that passes muster with the ATO.
Here’s a simple explainer of what you need to know.
What is salary sacrifice?
A salary sacrifice arrangement is a before-tax payment made from your employee’s salary or wages that can provide them with valuable tax advantages.
Under these arrangements (often called salary packaging), your employee agrees to forgo part of their future salary or wages in return for benefits of a similar value. Commonly, this involves paying the foregone salary into their super account.
Where the sacrificed salary is received as a super contribution, it’s classified as an employer – rather than an employee – super contribution and is taxed when it enters your employee’s super account.
How to create an effective salary sacrifice arrangement
Having an effective arrangement in place with your employee is essential when it comes to salary sacrifice. If it’s not considered ‘effective’, the benefits will be considered taxable income received by the employee at the time they are provided.
The ATO considers several factors essential when it comes to creating an effective salary sacrifice arrangement:
- Establish a written agreement – You should enter into a clear agreement with your employee stating the terms and conditions of the salary sacrifice arrangement, and it should be documented in writing to avoid any uncertainty or future disputes.
- Use future payments – Salary sacrifice arrangements can only apply to wage and salary payments for work yet to be performed, not past earnings. Salary and wages, leave entitlements, bonuses or commissions accrued before entering into the agreement cannot be used in an effective arrangement. The ATO may consider an arrangement ineffective if it is established after the work is performed.
- No access to sacrificed salary – For the arrangement to be effective, your employee must permanently forgo their sacrificed salary for the period documented in the agreement. If a benefit has not been provided and instead is cashed out at the end of the arrangement, the cashed-out amount is considered to be salary and is taxed as normal income.
- Pay contributions into a complying super fund – As super contributions made on behalf of an employee are considered employer contributions, they must be paid into a complying super fund. If they are paid into a non-complying super fund, they are considered to be a fringe benefit and you may be liable to pay Fringe Benefits Tax (FBT).
- Contributions must be for the employee – Since salary sacrifice contributions are considered employer contributions, they must not be made for the benefit of an associate (such as the employee’s spouse), or they will be classified as a fringe benefit. In addition, the contributions must not be a personal contributions and must not count towards the employee’s non-concessional (after tax) contributions cap.
- Maintain detailed records – The ATO requires employers to keep all relevant documentation (such as the written agreement with your employee) for five years. Ensure you keep written records of all salary sacrifice amounts you make, as these must be listed as Reportable Employer Super Contributions (RESC) on your employee’s annual payment summary.
Limits on salary sacrifice amounts and contributions caps
Unless there is a constraint in an employee’s contract or industrial award, generally there is no limit on the amount they can salary sacrifice into super. However, there are contributions caps your employee should be aware of before they decide the annual amount they wish to salary sacrifice into their super account.
Super funds do not differentiate between your employer SG contributions and salary sacrifice amounts, so both types of contributions will be assessed against your employee’s annual concessional (before-tax) contributions cap ($27,500 in 2021–22). From 1 July 2017 to 30 June 2021, the annual concessional contributions cap was $25,000.
If your employee exceeds their annual concessional contributions cap, they will pay additional tax on the excess amount. They may also have to pay Division 293 tax if their annual income (including concessional contributions) is more than $250,000.
Division 293 tax is imposed at a rate of 15% on top of the normal 15% contributions tax paid on concessional contributions when they enter a super account.
How to report salary sacrifice payments
If you make salary sacrifice contributions for one of your employees, the contributions must be reported to the ATO as Reportable Employer Super Contributions (RESC).
You can choose to report these RESC through your normal reporting process using the Single Touch Payroll (STP) system.
Alternatively, you can report the RESC on your employee’s annual payment summary. If you choose not to report the extra super contribution amounts through STP, you are still required to give payment summaries to your employees and submit a payment summary annual report to the ATO.
Your employees can now access online the information formerly available on their payment summaries via the ATO using their myGov login.
Salary sacrifice and government benefits
When salary sacrifice amounts are reported as RESC, they are not included as part of your employee’s assessable income but are included in the income tests governing eligibility for several government benefits.
The income tests affected by RESC include the Medicare levy surcharge, dependant and senior Australian tax offsets, super co-contributions, deductions for personal super contributions, low income super contributions, Division 293 tax on super contributions, spouse super contributions tax offset and HELP repayments.
Claiming tax deductions for salary sacrifice contributions
One of the overlooked benefits of allowing your employees to make salary sacrifice super contributions is that you can claim a tax deduction for them, as they are considered employer contributions.
You are permitted to claim a deduction against your business income for salary sacrifice contributions if the:
- Contributions are made under an effective salary sacrifice arrangement
- Contributions are made to a complying super fund
- Employee is under 75 years old. (There are specific circumstances where you may be able to claim a deduction for older employees.)
Claiming a tax deduction for your employee’s salary sacrifice contributions must be done in the financial year the super fund receives the relevant contributions. For example, if a contribution is received by your employee’s super fund on 16 June 2022, you can claim a tax deduction for the amount in the 2021–22 financial year.