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Employer super issues

Salary sacrifice arrangements

Section: 1.8

An effective salary sacrifice arrangement (SSA) involves an employee agreeing in writing to forgo part or all of their future remuneration in return for the employer providing benefits such as increased employer super contributions (but which also may include fringe benefits).

Amounts sacrificed under an effective SSA do not form part of the employee's assessable income and are not taxed at their marginal tax rate. Salary sacrificed super contributions will instead be subject to contributions tax of up to 15% when received by the employee's super fund and will count toward the employee's concessional cap (salary sacrifice contributions may also be subject to Division 293 tax). Effective salary sacrifice super contributions are tax-deductible to an employer and there is no limit to the amount of contribution/deduction. However, contributions in excess of an employee's concessional cap are assessable income of the employee, with a 15% tax offset applying.

If a SSA does not apply in respect of future remuneration (eg the employee purports to salary sacrifice into super salary already earned), the SSA is ineffective, meaning that:

  • The contributions are taxed at the employee's MTR
  • The contributions count instead towards the non-concessional contributions cap
  • The employer is not entitled to a tax deduction for making the super contribution (but instead may be able to deduct the amount as salary and wages paid to the employee).

A SSA is generally governed by the terms in an employee's employment contract; there is no specific statutory provision on its operation including the obligation to provide salary sacrifice contributions and their amount or timing.

Examples of an effective SSA include:

  • Agreeing with an employer at the start of a financial year to forgo $100 in salary per fortnight for the remainder of the financial year in return for $100 per fortnight in additional employer super contributions.
  • Electing to salary sacrifice 80% of a discretionary bonus (in return for additional employer super contributions) prior to being advised of the total bonus amount.

Examples of an ineffective SSA include:

  • Salary sacrificing half of a discretionary bonus where all of the conditions for the payment of the bonus have already been met, for example where the employer has already advised the employee of the amount and payment date of the bonus
  • Salary sacrificing annual and/ or long service leave entitlements that have become payable because of the termination of an employee's employment.

Salary sacrifice and fringe benefits tax (FBT)

Superannuation contributions made under an effective SSA on behalf of an employee are not fringe benefits, and hence not subject to fringe benefits tax. However, where the SSA provides for super contributions to be made by an employer for someone other than the employee (eg their spouse), those contributions will be a fringe benefit and FBT will be payable.

Salary sacrifice and RESCs

Contributions made under an effective SSA are reportable employer super contributions (RESCs). RESCs include any employer super contributions where the employee has (or might have) the capacity to influence the amount of the contribution or the way it is made, so as to reduce their assessable income.

RESCs must be reported by an employer on an employee's Payment Summary, and are included in the definition of 'income' when calculating a range of government benefits, including government co-contributions.

Last modified: Friday, July 28, 2017