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  • How to set up salary sacrifice for super

    Employers can set up a salary sacrifice for super arrangement with their employee to get the benefits of a salary sacrifice.

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    Salary sacrificing changes

    From 1 January 2020, you are required to pay super guarantee on your employee's ordinary time earnings (OTE) base.

    The OTE base includes any amounts that would have been OTE had they not been salary sacrificed. You can't use the reduced salary.

    This means salary sacrifice can't be used to reduce OTE and can't be counted as a contribution for super guarantee purposes.

    End of example

    Benefits of a salary sacrifice

    You benefit because the amount sacrificed is:

    • not a fringe benefit and not subject to fringe benefits tax
    • tax deductible.

    Your employee benefits because the salary-sacrificed amount is:

    • not declared as assessable income
    • not subject to PAYG tax
    • taxed in the super fund at the concessional rate of 15%. This is usually less than the PAYG tax rate.

    There is no limit to how much super employees can contribute each year. However, if the cap is exceeded, they may need to pay extra tax.

    An effective arrangement

    To create an effective salary sacrifice arrangement, you must:

    Set up the arrangement for employees' future earnings

    The arrangement must be set up for your employee's future earnings. It can't include previously earned or accrued:

    • salary, wages or entitlements
    • annual or long service leave.

    Document the arrangement

    You and your employee must prepare and sign a document that states the terms of the salary sacrifice arrangement. If you don't have this documentation, it may be difficult to establish the facts of your arrangement.

    Employees can renegotiate the arrangement at any time, within the terms of their employment contract or industrial agreement. If your employee has a renewable contract, you can renegotiate the salary sacrifice amount before the start of each renewal.

    Use a complying fund

    The salary sacrifice amount must be contributed to a complying fund for the period of the arrangement.

    Contributions can't be accessed until the employee satisfies a condition of release, such as reaching retirement age.

    A non-effective arrangement

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

    • considered a payment of salary or wages
    • considered a personal contribution, not an employer contribution
    • counted towards the employee's non-concessional contributions cap.

    This means:

    • the contributions are included in your employee's assessable income and subject to PAYG withholding tax
    • you are not entitled to a tax deduction for the sacrificed amount
    • your employee will be subject to excess non-concessional contributions tax (if they exceed the cap).

    Reporting and record keeping

    Reports you need to submit

    When you report online through Single Touch Payroll (STP), the amount will automatically appear on the income statement. You do not need to provide a payment summary.

    Records you need to keep

    When you enter into a salary sacrifice arrangement, you need to keep relevant records for 5 years, including:

    • copies of the arrangement
    • evidence of any expenses.

    Tax deductions and obligations

    Contributions to an employee's super fund made under an effective salary sacrifice arrangement are considered deductions.

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

    You can only deduct money for a salary sacrifice if:

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

    Claiming deductions

    You can claim a tax deduction for salary sacrifice contributionsExternal Link for your employees if you meet all 3 conditions:

    1. The contributions are made under an effective salary sacrifice arrangement.
    2. The contributions are made to a complying super fund.
    3. The employee is under 75 years old. In some situations, you can claim for older employees.

    When to pay contributions to claim a deduction

    You can only claim a deduction for a salary sacrifice contribution in the financial year the super fund receives it.

    Example: super fund receives payment after financial year

    • Sally pays her employee's super contribution to the Small Business Superannuation Clearing House on 30 June 2020.
    • The super fund receives the contribution on 3 July 2020.
    • Sally can't claim a tax deduction in the 2019–20 financial year. She can claim the deduction for the 2020–21 financial year. This is the year the super fund received the contribution.
    End of example

    Salary sacrificed contributions

    Salary sacrifice amounts and extra tax

    There's no limit to how much employees can salary sacrifice (unless there's a limit in their employment contract or agreement). If their contributions exceed their concessional contributions cap, they will pay more tax.

    Your employee needs to consider:

    • if the amount salary sacrificed together with the employee's super guarantee contributions will exceed their concessional contributions cap
    • how excess contributions will affect their tax.

    When setting up salary sacrifice arrangements, you should tell your employee:

    • when you will pay contributions
    • how they can adjust their contributions to stay under their contribution cap
    • to contact their fund to work out their contributions for the financial year.

    Your employee can ask you to change the timing of their super contributions but not the employer contributions.

    Contribution cap

    Salary sacrificed amounts are paid from pre-tax salary. This means they are part of the employee's concessional contributions for the financial year.

    Contributions above the cap will mean they pay more tax.

    Concessional contributions include:

    • employer contributions – such as super guarantee payments
    • salary sacrificed contributions.

    If an employee has more than one super fund, all concessional contributions are combined. They are also counted towards their contributions cap.

    Which year contributions apply to

    Super contributions you make for an employee count towards their contribution caps in the financial year the super fund receives them. For example, if you pay June 2019 contributions in July, they will count towards the 2019–20 financial year.

    The timing of your contributions can have consequences for your employee's contributions caps and tax. It could also have a consequence for the year you're entitled to a deduction. Ensure you leave enough time for the super fund to process your contributions.

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    Last modified: 26 May 2021QC 33744