Creating effective salary sacrifice arrangements with your employees

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 for super

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, and will be personal (after-tax) contributions counted towards the employee’s non-concessional contribution cap.

The ATO considers several factors essential when it comes to creating an effective salary sacrifice arrangement:

1. 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.
2. 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.
3. 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).

Limits on salary sacrifice amounts and additional taxes

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.

Both your employer SG and the employee’s salary sacrifice will be assessed against your employee’s annual concessional (before-tax) contributions cap ($27,500 in 2021-22 and 2022–23). Your employee’s cap may be higher if they have unused cap amounts from previous years (carry-forward concessional contributions).

If your employee exceeds their annual concessional contributions cap, they will pay additional tax on the excess amount.

Employees should also be aware that they will 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 and keep records

The ATO requires you to keep records of salary sacrifice arrangements in English. These records must be kept for five years after they are prepared, obtained, or after the transactions are completed, whichever occurs last.

Salary sacrifice 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 required to give payment summaries to your employees and submit a payment summary annual report to the ATO.

If you report all information via STP and do not issue payment summaries, your employees can access the information formerly available on their payment summaries via the ATO using their myGov login.

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. (For employees turning 75, you may claim a deduction for salary sacrifice contributions received by a fund up to the 28^th day of the month following the employee’s 75^th birthday).

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.

If you use a clearing house to process super contributions, remember there is a delay between the date you pay the clearing house and the date the super fund will receive the contribution. This delay could mean that contributions you pay to a clearing house near the end of a financial year will not be credited to the fund until after 30 June, affecting the year you are able to claim a tax deduction.

The exception to this rule is if you are using the ATO’s Small Business Superannuation Clearing House (SBSCH). The ATO indicates that if you pay the SBSCH on or before 30 June, your deduction can be claimed in that financial year – there is no requirement to check what financial year the contribution was received in the super fund. The ATO’s guidance is available here.