Rules for an effective salary sacrifice 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 – 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, which means:
- you won't be entitled to a tax deduction for the sacrificed amount
- you may have underpaid employer contributions and be liable to the super guarantee charge
- counted towards the employee's non-concessional contributions cap – if the cap is breached, the employee will be subject to additional tax on the contributions.
If the contributions 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 and 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 also not tax deductible.
The arrangement should be entered into before the employee performs the work
To be an effective salary sacrifice arrangement, the arrangement must be prospective. That is, the arrangement must be for your employee's future earnings rather than any salary, wages or entitlements they have already earned. For example, an effective salary sacrifice arrangement can't include annual or long service leave your employee accrued before entering into the arrangement.
There should be an agreement between you and your employee
It's advisable for you and your employee to clearly state and agree on 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.
Subject to the terms of any contract of employment or industrial agreement, employees can renegotiate a salary sacrifice arrangement at any time. 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. If, for example, a salary-sacrificed super contribution is not made and instead cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is salary and is taxed at PAYG withholding rates.
When salary is sacrificed into super the contributions are preserved in the fund and can't be accessed by the employee until they satisfy a condition of release, such as reaching the age of 65.