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  • Salary sacrificing super – information for employers

    An employee can 'sacrifice' part of their salary or wages into super contributions under an agreement with you. You then pay the sacrificed amount to your employee's super fund on their behalf.

    There may be benefits to both of you in that:

    • for your employee  
      • salary sacrificing is a tax effective way of increasing their super, provided they stay within their contribution caps
    • for you  
      • salary sacrificed super contributions aren't subject to fringe benefits tax
      • the contributions are tax deductible.

    To get these benefits, the contributions must be:

    It is advisable that you and your employee clearly state and agree on all the terms of any salary sacrifice arrangement. You should consult the Fair Work CommissionExternal Link before proceeding.

    Salary sacrifice contributions you make for an employee must be included on their annual payment summary as reportable employer super contributions.

    You don't have to offer or agree to salary sacrifice arrangements with your employees. You may wish to speak to a tax adviser about the implications for your business.

    Changes from 1 January 2020

    From 1 January 2020, salary sacrificed super contributions can't be used to reduce your super guarantee obligations, regardless of the amount your employee elects to salary sacrifice.

    This means the salary sacrificed amount does not count towards your super guarantee (SG) obligations.

    A further change is that the super guarantee will be 9.5% of the employee's ordinary time earnings (OTE) 'base'. The base is the sum of:

    • the employee's OTE, and
    • any amounts which would have been OTE, had they not been salary sacrificed into a complying super fund or Retirement Savings Account.

    You need to:

    • review your salary sacrifice arrangements to make sure you are
      • using your employee's OTE base to calculate your SG obligation
      • not counting salary sacrificed amounts towards the minimum amount of SG you have to pay
    • check that all your systems correctly calculate your SG obligations.

    Example: Employer adjusts arrangement to ensure amounts salary sacrificed are now included in the employee's OTE base

    Sharon earns $2,000 a week and has an effective salary sacrifice agreement with her employer to sacrifice $250 to her superannuation fund each week. Sharon's salary only comprises OTE amounts.

    Sharon’s employer previously calculated his SG liability on Sharon's after salary sacrifice wage as follows:

    • $2,000 − $250 = $1,750
    • $1,750 × 9.5% = $166.25 SG liability

    From 1 January 2020, Sharon’s employer must calculate the SG liability on her OTE base which includes amounts which would have been OTE amounts, had they not been salary sacrificed into a complying superannuation fund. The calculation is:

    • $2,000 × 9.5% = $190.00

    This is in addition to the $250 Sharon salary sacrifices each week.

    Sharon’s employer makes the following payments to her super fund:

    • salary sacrificed amounts of $250 each week (as per agreement)
    • SG contributions of $2,470 each quarter ($190 × 13 weeks).
    End of example

    Find out about:

    Rules for an effective salary sacrifice arrangement

    As an employer you have obligations under the Fair Work Act 2009 for deductions made from an employee’s wages.

    Salary sacrifice arrangements into an employee’s super fund are considered deductions. As an employer you can only deduct money if:

    • the employee agrees in writing to a deduction from their wages
    • the deduction  
      • is principally for the employee's benefit
      • complies with the employee’s enterprise agreement
      • is allowed by a law, a court order, the Fair Work Commission or an employee’s award.

    The Fair Work Commission regulates employment agreements and conditions. To check your conditions contact Fair Work CommissionExternal Link.

    The Fair Work Ombudsman has information on deducting pay and overpaymentsExternal Link. You can phone the Fair Work Ombudsman on 13 13 94.

    Definition of an effective arrangement

    To get the benefits of salary sacrificing – for you and your employee – you need to have an 'effective salary sacrifice arrangement'. This means:

    If the arrangement is not effective, super contributions made under the arrangement are:

    • considered a payment of salary or wages – this means they will be included in your employee's assessable income and subject to PAYG withholding tax
    • considered a personal contribution rather than an employer contribution – this means  
      • you won't be entitled to a tax deduction for the sacrificed amount
      • you may have underpaid your employer SG contributions and be liable to the super guarantee charge
    • counted towards the employee's non-concessional contributions cap – this means if the cap is reached the employee will be subject to non-concessional contributions tax.

    The arrangement should be entered into before the employee performs the work

    The arrangement must be prospective. That is, the arrangement must be for your employee's future earnings. It can't be for any salary, wages or entitlements they have already earned. This means, an effective salary sacrifice arrangement can't include annual or long service leave your employee accrued before entering into the arrangement.

    There should be a documented agreement between you and your employee

    It's advisable for you and your employee to prepare and sign a document that clearly states all the terms of the salary sacrifice arrangement. If you enter into an undocumented salary sacrifice arrangement, you may have difficulty establishing the facts of your agreement.

    Employees can renegotiate a salary sacrifice arrangement at any time, subject to the terms of any contract of employment or industrial agreement. If the employee is engaged under a renewable contract, you and your employee can renegotiate amounts of salary or wages to be sacrificed before the start of each renewal.

    Sacrificed salary must be permanently foregone

    The sacrificed salary must be permanently foregone for the period of the arrangement. This means, for example, that if a salary-sacrificed super contribution was not made but was instead cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is:

    • counted as salary
    • taxed at PAYG withholding rates.

    When salary is sacrificed into super the contributions are preserved in the fund. They can't be accessed by the employee until they satisfy a condition of release, such as reaching their preservation age.

    Complying super funds

    Salary sacrifice contributions must be made to a complying super fund.

    If they are made to a non-complying fund they're considered a fringe benefit.

    This means:

    • you'll be subject to fringe benefits tax on the sacrificed amount
    • the contributions must be recorded on your employee's payment summary as a reportable fringe benefit.

    Contributions made for your employee to a non-complying super fund are not tax deductible.

    See also:

    Next steps:

      Last modified: 27 Feb 2020QC 17235