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Salary Sacrifice - An introduction
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George & John August 2010 Newsletter

Salary Sacrifice - An introduction

If you are considering offering salary sacrifice arrangements to your employees, you may wish to speak to a recognised tax adviser about the implications the arrangement may have for your business.

What is salary sacrifice? 

Salary sacrifice is an arrangement by which an employee agrees to forego part of their future salary or wages in return for their employer providing benefits of a similar value.

A contractual agreement with your employee to alter their salary package by exchanging part of their future salary or wages for another benefit is called a ‘salary sacrifice arrangement’. A legitimate salary sacrifice arrangement cannot be made retrospectively for salary or wages which have already been earned.

What can an employee salary sacrifice?

Subject to your agreement, an employee can sacrifice their salary or wages into a variety of benefits including:

  • super
  • car fringe benefits
  • expense payment fringe benefits, such as school fees, child care costs or loan repayments.

What are the benefits of making super contributions through a salary sacrifice arrangement?

If you make super contributions for an employee under an effective salary sacrifice arrangement, there may be benefits for both you and your employee.

Salary sacrificed super contributions are not a fringe benefit but may be a reportable employer super contribution

If salary sacrificed super contributions are made to a complying super fund, the sacrificed amount is not considered a fringe benefit for tax purposes. You will not be liable to pay fringe benefits tax on the super contributions and the contributions will not be included as a reportable fringe benefit amount on your employee’s payment summary. Salary sacrificed contributions are treated as employer contributions. However, from the 2009-10 financial year, salary sacrificed super contributions (in excess of mandated contributions) must be reported on your employee's payment summary as reportable employer super contributions.

 If salary sacrificed super contributions are made to a non-complying super fund, the contributions will be a fringe benefit. This means you will be subject to fringe benefits tax on the sacrificed amount and the super contributions will be recorded on your employee’s payment summary as a reportable fringe benefit.

Salary sacrificed super contributions may not be a fringe benefit if you have grounds for believing that you are making a contribution to a complying fund. 
Super contributions are deductible

If your employee is under 75 years old, you can claim a deduction on all employer super contributions, including salary sacrificed contributions, you make to their fund for the employee (assuming other deduction requirements are met). However, if the employee has turned 75, you must have paid the super contribution within 28 days after the end of the month in which the employee turned 75.

You can still claim a deduction for employer super contributions for someone 75 years old or over if you were required to make the contributions by an industrial award or determination, or notional agreements preserving state awards.

The sacrificed component of your employee’s total earnings is not part of their assessable income for taxation purposes. This means that the sacrificed component is not included as income on their payment summary and is not subject to pay as you go (PAYG) withholding tax.

However, voluntary employer contributions such as salary sacrifice amounts must be reported on your employee's payment summary as reportable employer super contributions.

Reportable employer super contributions are not included in your employee's assessable income. However, these contributions are included in the income tests for some benefits and obligations, such as:

  • deductions for personal super contributions and non-commercial losses
  • the super co-contribution
  • the Medicare levy surcharge threshold calculation
  • a range of Centrelink and child support benefits and obligations.

How much can an employee salary sacrifice?

In the 2010-11 Federal Budget the government announced future changes to super. These changes, if passed by parliament, will change the information on this page. For a summary of these changes, refer to Changes to super.

You will need to check the terms of the relevant industrial law, award, workplace agreement or employment contract under which your employee is working. If there are no limitations specified in the terms of their employment, there is no limit to the amount your employee can salary sacrifice.

However, when salary sacrificing super contributions, your employee will need to consider whether the amount salary sacrificed to super will affect the amount of tax paid on their super contributions.

Salary sacrificed contributions to a super fund form part of the employee's ‘concessional contributions’ for the financial year. Concessional contributions include employer contributions such as super guarantee payments and salary sacrifice amounts sent by you to your employee's super fund. There is a cap on the amount of concessional contributions that an individual can make each financial year before paying extra tax. Contributions you make for your employees count towards their concessional contributions cap in the financial year the super fund receives them. This means if you pay your accrued June quarter employer contributions for the 2010–11 financial year in July, they will count towards your employees' 2011–12 concessional contributions cap.

 Your employees may approach you to change when you make their super contributions so their super fund receives them by a certain time. However, before doing so, we recommend you encourage your employees to contact their fund to work out the running balance of their employer contributions for the year. By doing this, they may find that changing your contributions pattern will cause them to exceed their concessional contributions cap and incur extra tax.
For the 2010-11 financial year, the concessional contributions cap is $25,000 and the transitional concessional contributions cap (for those 50 years old and over) is $50,000.

The non-concessional contributions cap in 2010-11 financial year is $150,000. If your employee is under 65 years old at any time during the financial year, they may be able to bring forward the next two years of contributions, but certain conditions apply. This effectively allows them to contribute up to three times the cap at once, or at any time during the three financial years.

Contributions that an employee makes to a super fund from money on which they have already paid tax are non-concessional contributions. This includes amounts that you might pay to their super fund on their behalf from their after-tax salary.

Example 2

Rowena has an after-tax fortnightly income of $2,000. Her employer sends $1,000 of her pay to her home loan account, $800 to her savings account and $200 to her super fund. Although the $200 is paid by her employer to her super fund, this is a personal contribution for Rowena. Her employer is merely paying her money to the super fund on her behalf and at her direction.

 The tax rate for contributions over a cap is:

  • 31.5% for excess concessional contributions (in addition to the 15% paid by the super fund)
  • 46.5% for excess non-concessional contributions.

Source:  The Australian Taxation Office.  To read more on this topic click here.