Contributed by Allan Coe, Senior Content Specialist, Wolters Kluwer CCH
From 1 July 2018, individuals will be able to withdraw eligible super contributions made since 1 July 2017 for the purchase of a first home. Up to a limit, the amount that can be released is known as the releasable amount, which is the sum of an individual’s eligible non-concessional contributions (post-tax contributions) plus 85% of an individual’s eligible concessional contributions (pre-tax or salary sacrificed contributions, but does not include mandated or superannuation guarantee (SG) contributions). In addition, associated earnings can be also released.
The focus of this article is how proposed changes to salary sacrifice rules will change the definition of mandated contributions from 1 July 2018, resulting in a lesser amount being released for a first home where contributions are made after this date.
SG and salary sacrifice
Currently, an employer is mandated to make a 9.5% SG contribution on the ordinary time earnings of an employee. Ordinary time earnings do not include salary sacrificed amounts. However, there is a proposal (currently in Bill form) that from 1 July 2018 the mandated SG contribution is also calculated on super salary sacrificed amounts. While this change is generally a win for employees as it increases mandated SG contributions, the flipside is that this reduces eligible concessional contributions (non-mandated contributions) that can be released. The example below illustrates that the amount released for the purchase of a first home may be 9.5% less under the proposed changes.
Example: Same salary sacrifice contribution in different years leads to different releasable amount
Susan’s employment contract entitles her to a salary package of $109,500 a year from her employer which is currently comprised of $100,000 salary and $9,500 super. As this $9,500 contribution is a mandated SG employer contributions (9.5% of $100,000) there is no amount eligible for release. Susan is not entitled to access this super under the first home super saver scheme.
Susan decides she wants to salary sacrifice $12,000 of her $109,500 salary package into super with an intent to access these contributions and earnings for the purchase of a first home. Susan enters a new employment contract so that her $109,500 salary package now comprises $88,000 salary and $21,500 super (original $9,500 plus sacrificed $12,000). Susan enters into this super salary sacrifice arrangement for the 2017/18 and 2018/19 financial years.
Releasable amount for contributions before 1 July 2018 salary sacrifice changes
Under Susan’s new employment contract her employer makes a $21,500 super contribution which is a mix of mandated SG contributions (not eligible for release) and non-mandated contributions (eligible concessional contributions which can be released). For 2017/18, the mandated SG contributions are 9.5% of Susan’s ordinary time earnings. Susan’s $12,000 salary sacrifice has reduced her ordinary time earnings from $100,000 to $88,000, which requires a mandated 9.5% SG contribution of $8,360 (instead of previous $9,500). Susan’s eligible concessional contributions (non-mandated contribution) is $13,140 ($21,500 super contribution less $8,360 mandated contribution). The releasable amount is 85% of eligible concessional contributions, which means that in the future Susan can withdraw 85% of $13,140 plus earnings under the first home super saver scheme.
Releasable amount for contributions after 1 July 2018 salary sacrifice changes
As per the previous financial year, Susan’s employer makes a $21,500 super contribution which is a mix of mandated SG contributions and non-mandated contributions. However, unlike the previous financial year, the mandated SG contribution for 2018/19 is calculated on ordinary time earnings plus any salary sacrificed amount. The mandated 9.5% SG contribution is therefore calculated on $100,000 ($88,000 ordinary time earnings plus $12,000 super salary sacrificed) and is $9,500. Only the salary sacrificed $12,000 ($21,500 super contribution less $9,500 mandated contribution) is an eligible concessional contribution (non-mandated) and counts when determining the releasable amount. Susan can withdraw 85% of the $12,000 plus earnings under the first home super saver scheme.
Consequence of the salary sacrifice change for first home buyers
In our example, Susan makes the same salary sacrificed superannuation contribution in both financial years. For contributions made in the 2017/18 financial year the releasable amount is 85% of $13,140. For contributions made in the 2018/19 financial year, the releasable amount is 85% of $12,000. The releasable amount for Susan is 9.5% less for salary sacrificed contributions made from 1 July 2018.
If an individual is salary sacrificing with an intent to use the first home super saver scheme, there is a greater amount that can be released for contributions made in the 2017/18 financial year compared to future financial years. This is due to mandated contributions being calculated in the future on ordinary time earnings plus salary sacrificed amount, thus reducing the eligible concessional contributions (non-mandated), and lessening the releasable amount for a first home by 9.5%.
Other things to consider
In addition to a larger amount being withdrawn for contributions made in the 2017/18 financial year, associated earnings can also be withdrawn which further increases the attractiveness of superannuation contributions in the current financial year. However, there are a few things for an individual to consider. Firstly, both the first home super saver scheme and the salary sacrifice changes are in Bill form and neither are law at this time. There may be amendments made prior to these proposals becoming law. Secondly, the above analysis assumes that the employer will maintain the overall salary package for the employee and does not utilise the salary sacrificed amounts to satisfy their SG obligations. Finally, there is a contribution limit of $15,000 per financial year that can be withdrawn. If the salary sacrificed amount is in excess of this limit, then these limits will apply for each financial year.