Contributed by Gary Chau, Lawyer and Bryce Figot, Special Counsel, DBA Lawyers
A salary sacrifice arrangement is still worthwhile post-30 June 2017 since some employees find it both administratively easier and tax-effective for their employer to contribute more into superannuation in lieu of their future salary and wages.
Unfortunately, some employees will be let down by a gap in the way our salary sacrifice regime operates, which allows employers to meet their mandated superannuation guarantee (SG) obligation and overall contribute less money to an employee’s superannuation fund. However, a draft law aims to close this gap.
What is a salary sacrifice arrangement?
Broadly, a salary sacrifice arrangement is where an employee, with their employer’s consent, foregoes a certain amount of their future salary and wages and the employer is expected to contribute the sacrificed amount to the employee’s superannuation fund.
These contributions are deductible for the employer and are not included in the assessable income of the employee (subject to the possibility of the employee exceeding their concessional contributions cap). Rather, these contributions are included in the assessable income of the superannuation fund and generally taxed concessionally at a rate of 15%.
The SG regime
The SG regime is established under the Superannuation Guarantee (Administration) Act 1992 (SGAA). Broadly, the regime requires employers to make superannuation contributions for their employees equal to at least the minimum level of superannuation support set out in the legislation (which is 9.5% for the 2017/18 financial year).
Technically, the SGAA does not place a positive obligation on an employer to pay superannuation contributions on behalf of an employee. However, where an employer fails to pay the minimum level of superannuation contributions on behalf of an employee, which is measured on a quarterly basis (for the quarters ending on 31 March, 30 June, 30 September and 31 December), the employer will be liable to pay the SG charge on their SG shortfall (s 16 of the SGAA).
The gap in the current salary sacrifice regime
To illustrate the gap under the current regime, consider the following scenario:
Tony works for his employer, BAD BOSS PTY LTD, and receives $100,000 in salary and wages. His ordinary time earnings for the purposes of the SGAA is $25,000 per quarter. Tony would have an entitlement to $2,375 in SG contributions per quarter, which is determined by multiplying $25,000 by 9.5% (the current minimum SG contribution rate).
Tony enters into a salary sacrifice arrangement with BAD BOSS PTY LTD where he sacrifices $2,000 for each quarter from his salary and wages and in return, his employer is meant to contribute the $2,000 to his superannuation fund (on top of the employer’s mandated SG obligation). Tony expects his superannuation contributions to rise to $4,375 per quarter.
Unfortunately, under the current SG regime, BAD BOSS PTY LTD could use the sacrificed amount, $2,000, to satisfy part of the BAD BOSS PTY LTD’s mandated SG obligations and only makes a contribution to Tony’s superannuation fund of $2,375 (which comprise mostly of Tony’s $2,000 salary sacrificed amount). In a perverse turn of events, it is also worth noting that BAD BOSS PTY LTD’s mandated SG obligations would also be lower at $2,185 and calculated in respect of $23,000 instead of $25,000 (ie $25,000 minus salary sacrifice amount) per quarter.
In this scenario, Tony would only be sacrificing $2,000 from his quarterly salary and wages with no additional contributions being made to his fund beyond BAD BOSS PTY LTD’s mandated SG obligation. For Tony to realise the error, he would need to check with his superannuation fund, which, like most people, he checks only once a year around tax time.
While the above example may seem ludicrous and unconscionable (on the part of the employer), unfortunately it seems that this gap is utilised by some employers. In the Industry Super Australia and CBUS’s report, Overdue: Time for Action on Unpaid Super, released in December 2016, it estimates that up to $1b in superannuation guarantee in the 2013/14 financial year was met by employers using employee salary sacrifice contributions. In a contrary view, the Superannuation Guarantee Cross-Agency Working Group’s interim report released in January 2017, which is a report to the government, says that based on the available ATO evidence, this practice is not widespread and the stated $1b is likely to be a very large overestimate. Nevertheless, both the industry bodies and working group have recommended that the government close this gap.
A draft law to close the gap
Based on the recommendations from the Superannuation Guarantee Cross-Agency Working Group to the government, on 14 September 2017, the Minister for Revenue and Financial Services, Kelly O’Dwyer, introduced to parliament the Treasury Law Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 2) Bill 2007 to “improve the integrity of the superannuation system by ensuring that an individual’s salary sacrifice contributions cannot be used to reduce an employer’s minimum superannuation guarantee (SG) contribution”.
This Bill proposes to implement the Superannuation Guarantee Cross-Agency Working Group’s recommendations that the Superannuation Guarantee (Administration) Act 1992 be amended to:
- prevent contributions made as part of a salary sacrifice arrangement from satisfying an employer’s SG obligations, and
- specifically include salary or wages sacrificed to superannuation in the base for calculating an employer’s SG obligations.
The Bill proposes to introduce a number of new provisions to close the gap. In particular, the Bill proposes to add a new interpretation provision, s 15A, titled “Interpretation: salary sacrifice arrangements”, which will contain the following:
15A Interpretation: salary sacrifice arrangements
Salary sacrifice arrangement
- (1) An arrangement under which a contribution is, or is to be, made to a complying superannuation fund or an RSA by an employer for the benefit of an employee is a salary sacrifice arrangement if the employee agreed:
- (a) for the contribution to be made, and
- (b) in return, for either or both of the following amounts to be reduced (including to nil):
- (i) the ordinary time earnings of the employee,
- (ii) the salary or wages of the employee.
- (2) If an amount mentioned in subparagraph (1)(b)(i) or (ii) is reduced under a salary sacrifice arrangement, the amount of that reduction is:
- (a) if ordinary time earnings for a quarter are reduced — a sacrificed ordinary time earnings amount of the employee for the quarter in respect of the employer, and
- (b) if salary or wages for a quarter are reduced — a sacrificed salary or wages amount of the employee for the quarter in respect of the employer.
Excluded salary or wages
- (3) In working out the amount of a reduction for the purposes of subsection (2), disregard any amounts that, had they been paid to the employee (instead of being reduced), would have been excluded salary or wages.
- (4) For the purposes of this section, excluded salary or wages are salary or wages that, under section 27 or 28, are not to be taken into account for the purpose of making a calculation under section 19.
Quarterly salary or wages base, for the employer in respect of the employee for the quarter × (Charge for the employer for the quarter) / 100
quarterly salary or wages base, for an employer in respect of an employee, for a quarter means the sum of:
- (a) the total salary or wages paid by the employer to the employee for the quarter, and
- (b) any sacrificed salary or wages amounts of the employee for the quarter in respect of the employer.
In calculating an employer’s SG shortfall, an employer must also include any amount salary sacrificed to work out their SG obligation to an employee. This ensures that an employee’s SG obligations are calculated on the employee’s pre-salary sacrifice base and not on the employee’s reduced salary and wages (ie post-salary sacrifice).
Further, under the proposed changes to s 23(2), an employer’s SG charge, which arises if they have not met their mandated SG obligations (and thus have an SG shortfall), will only be reduced if the employer makes a contribution (other than a sacrificed contribution). A sacrificed contribution means “a contribution to a complying superannuation fund or an RSA made under a salary sacrifice arrangement”.
The scenario under the proposed Bill
Revisiting the scenario above with Tony, the following would occur under the proposed Bill:
Tony’s quarterly salary or wages is $25,000. Tony enters the salary sacrifices arrangement with BAD BOSS PTY LTD and sacrifices $2,000.
For Tony’s employer, BAD BOSS PTY LTD, the proposed s 19(1) formula provides that in working out BAD BOSS PTY LTD’s SG shortfall it is now calculated in respect of Tony’s quarterly salary or wages base. Tony’s quarterly salary or wages base is worked out by totalling Tony’s total salary or wages for the quarter, $23,000, and any sacrificed salary or wages amounts of the employee for the quarter, $2,000, which adds up to $25,000. Tony would have an entitlement to $2,375 in SG contributions per quarter. Hence, if BAD BOSS PTY LTD makes less than $2,375 in contributions to Tony’s superannuation fund, it would have a SG shortfall.
Thus, if BAD BOSS PTY LTD only contributed $2,375 for a quarter, which comprises mostly of the $2,000 that was salary sacrificed, it would have a SG shortfall for that quarter.
The new provisions make clear that salary sacrifice amounts cannot be used to reduce an employer’s mandated SG obligations.
The Bill notes that the proposed changes will apply on or after 1 July 2018.