Explanatory Memorandum
(Circulated by authority of the Minister for Housing and Assistant Treasurer the Hon Michael Sukkar MP)Chapter 7 - Salary sacrifice integrity
Outline of chapter
7.1 Schedule 7 to this Bill amends the SGAA 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 SG contributions.
7.2 All legislative references in this Chapter are to the SGAA.
Context of amendments
7.3 In December 2016, the Government established the Superannuation Guarantee Cross-Agency Working Group to investigate practical ways to improve employer compliance with their SG obligations.
7.4 On 14 July 2017, the Minister for Revenue and Financial Services announced that the Government would amend the SGAA to implement recommendations made by the Cross-Agency Working Group to close loopholes that could be used by employers to short change employees who choose to make salary sacrifice contributions into their superannuation accounts and released the Cross-Agency Working Group's Report, Superannuation Guarantee Non-compliance.
7.5 In particular, these amendments will implement the Cross-Agency Working Group's recommendations to amend the law to:
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- prevent contributions made as part of a salary sacrifice arrangement from satisfying an employer's SG obligations (Recommendation 8); and
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- specifically include salary or wages sacrificed to superannuation in the base for calculating an employer's SG obligations (Recommendation 9).
7.6 Under a salary sacrifice arrangement an employee agrees to forego part of their future salary or wages in return for their employer providing benefits of a similar value - for example, in exchange for a company provided car or childcare benefits.
7.7 Employees are also able to salary sacrifice amounts of their future salary and wages to be paid by their employer to a superannuation fund as superannuation contributions. These contributions are deductible for the employer and are not included in the assessable income of the employee (subject to concessional contributions caps). Instead, these contributions are included in the assessable income of the superannuation fund and generally taxed concessionally at a rate of 15 per cent.
7.8 Currently, salary sacrificed amounts count towards employer contributions that reduce an employer's mandated SG contributions. In addition, employers can calculate SG obligations on a (lower) post salary sacrifice earnings base. While employees salary sacrificing may obtain other taxation benefits, employees who salary sacrifice to boost their superannuation savings may end up with lower superannuation contributions than they expect.
Summary of new law
7.9 Schedule 7 to this Bill amends the SGAA to prevent employers from using their employees' salary sacrifice superannuation contributions to reduce their own SG contributions and ensure that SG is paid on the pre-salary sacrifice base.
7.10 The amendments 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 SG contributions.
7.11 The Government announced the changes on 14 July 2017 as part of its response to the Cross-Agency Working Group's Report, Superannuation Guarantee Non-Compliance.
Comparison of key features of new law and current law
| New law | Current law |
| Amounts that an employee salary sacrifices to superannuation cannot reduce an employer's SG charge. Salary sacrificed amounts also do not form part of any late contributions an employer makes that are eligible to be offset against the SG charge. | Amounts that an employee salary sacrifices to superannuation may reduce an employer's SG charge. Salary sacrificed amounts, if paid late, may also be offset against the SG charge. |
| To avoid a shortfall an employer must contribute at least 9.5 per cent of an employee's ordinary time earnings (OTE) base to a complying superannuation fund or retirement savings account (RSA). An employee's OTE base is comprised of their OTE and any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement. | To avoid a shortfall an employer must contribute at least 9.5 per cent of an employee's OTE to a complying superannuation fund or RSA. The employer may choose whether or not to include salary sacrificed amounts in the OTE. |
| If an employer has a shortfall, the amount of the shortfall is calculated by reference to their employee's total salary or wages base. An employee's salary or wages base is comprised of their salary and wages, and any amounts sacrificed into superannuation that would have been salary or wages, but for the salary sacrifice arrangement. | If an employer has a shortfall, the amount of the shortfall is calculated by reference to their employee's total salary and wages. The employer may choose whether or not to include salary sacrificed amounts in the employee's salary or wages. |
Detailed explanation of new law
7.12 The amendments implement the Cross Agency Working Group's recommendation to ensure SG is paid on the pre-salary sacrifice base (Recommendation 9) and that salary sacrificed amounts are not used to reduce the minimum amount of SG the employer must pay (Recommendation 8). Recommendation 9 is achieved by introducing the concepts of quarterly salary and wages base and OTE base which explicitly include sacrificed amounts. The amendments implement Recommendation 8 by providing amounts sacrificed under a salary sacrifice arrangement will not reduce an employer's mandated SG contributions.
Working out the SG shortfall
7.13 Employers are liable for the SG charge for a quarter if they have a shortfall for the quarter (section 16). An employer's shortfall is calculated by reference to the SG charge percentage, which is currently 9.5 per cent (subsection 19(2)).
7.14 An employer will not have a shortfall for a quarter if they contribute at least 9.5 per cent of an employee's OTE base for the quarter. If insufficient contributions are made, the shortfall is calculated by multiplying the difference between 9.5 per cent and the actual percentage of contributions that were made, by the employee's quarterly salary or wages base. [Schedule 7, items 3 and 7, subsection 19(1)(formula) and subsection 23(2)(formula)]
7.15 These amendments introduce the concept of the quarterly salary or wages base. This concept applies to an employer in respect of an employee and is the sum of:
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- the total salary or wages paid by the employer to the employee for the quarter; and
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- any salary or wages amounts of the employee for the quarter in respect of the employer that have been sacrificed into superannuation.
[Schedule 7, items 1 and 4, definition of 'quarterly salary or wages base' in subsection 6(1) and subsection 19(1)]
7.16 The inclusion of sacrificed salary or wages amounts ensures that the shortfall and charge is calculated on the pre-salary sacrifice base and that employers cannot calculate their superannuation guarantee obligations on reduced salary and wages.
7.17 A sacrificed salary or wages amount refers to the amount by which an employee agrees their salary and wages be reduced for a quarter under a salary sacrifice arrangement. A salary sacrifice arrangement is one under which:
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- a contribution is made, or will be made to a complying superannuation fund or an RSA by the employer for the benefit of the employee; and
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- the contribution was made because the employee agreed for it to be made in return for the employee's salary or wages for the quarter being reduced.
[Schedule 7, items 1 and 2, definition of 'salary sacrifice arrangement' in subsection 15A(1), definition of 'sacrificed salary or wages amount' in subsection 6(1) and paragraph 15A(2)(b)]
7.18 Sacrificed salary or wages amounts do not include amounts that, had they been paid to an employee, would have been excluded salary and wages. [Schedule 7, item 2, subsections 15A(3) and 15A(4)]
7.19 Salary and wages are excluded salary or wages if they are paid to, for example, a part-time employee under 18 years of age, an employee to whom an international social security agreement applies or an employee who earns less than $450 a month (sections 27 and 28).
7.20 Where sacrificed salary or wages amounts under a salary sacrifice arrangement are taken into account for the one quarter, but not actually contributed to the fund in that quarter - the amount will be counted in the quarter to which the salary sacrifice arrangement relates. Where sacrificed salary or wages amounts are never contributed and instead paid to the employee in a later quarter (for example, at the employee's request) - they will be disregarded to avoid double counting. [Schedule 7, item 5, subsection 19(3)]
7.21 The quarterly salary and wages base remains subject to limits set by the maximum contribution base. [Schedule 7, item 5, subsection 19(4)]
Reduction of the SG charge percentage
7.22 These amendments ensure that the SG charge percentage of an employer in relation to an employee is reduced if, so far as is relevant, the employer makes a contribution (other than a sacrificed contribution) to a superannuation fund that is not a defined benefit fund or to an RSA for the employee's benefit (section 23). The amount of the reduction is worked out using the formula:
[Schedule 7, item 7, subsection 23(2)(formula)]
A sacrificed contribution is one made to a complying super fund or RSA under a salary sacrifice arrangement. [Schedule 7, item 1, subsection 6(1)]
These amendments clarify that sacrificed contributions are not taken into account in applying the above formula. This ensures that sacrificed contributions are not treated as contributions that reduce an employer's SG charge. [Schedule 7, item 6, subsection 23(2)]
7.23 The OTE base is the number of dollars in the sum of:
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- the OTE of the employee for the quarter; and
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- any sacrificed OTE amounts of the employee for the quarter in respect of the employer.
[Schedule 7, item 9, definition of 'ordinary time earnings base' in subsection 23(2)]
7.24 This ensures that mandatory employer contributions that reduce the SG charge are calculated on a pre-salary sacrifice base.
7.25 A sacrificed ordinary time earnings amount refers to the amount by which an employee agrees their OTE be reduced for a quarter under a salary sacrifice arrangement. A salary sacrifice arrangement is one under which :
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- a contribution is made or will be made to a complying superannuation fund or an RSA by the employer for the benefit of the employee; and
- •
- the contribution is made because the employee agreed for it to be made in return for the employee's OTE for the quarter being reduced.
[Schedule 7, items 1 and 2, definition of 'sacrificed ordinary time earnings amount' in subsection 6(1) and paragraph 15A(2)(a)]
7.26 Sacrificed OTE amounts do not include amounts that would have been excluded salary and wages if they had been paid to the employee and will therefore not be counted as part of the OTE base. [Schedule 7, items 2, 11, 12 and 13, subsections 15A(3), 15A(4) and 23(12)]
7.27 Where sacrificed OTE amounts under a salary sacrifice arrangement are taken into account for one quarter, but not actually contributed to the fund in that quarter - the amount will be counted in the quarter to which the salary sacrifice arrangement relates. Where sacrificed OTE amounts are never contributed at all, for example, where they are paid as OTE instead of being contributed to superannuation - they will be disregarded to avoid double counting. [Schedule 7, item 10, subsection 23(7A)]
7.28 In addition, where the employer makes a late contribution for their employee and seeks to offset it against the SG charge they have incurred, sacrificed amounts cannot form part of that late contribution. [Schedule 7, item 14, subsection 23A(1)]
7.29 Section 23B allows small businesses to comply with employee choice of fund requirements while minimising compliance costs, by providing a free Small Business Superannuation Clearing House through which contributions can be paid to various funds. Section 23B ensures small businesses that make contributions through an approved clearing house are treated as having complied with their SG obligations by making the contribution to their employee's fund or RSA. The provision currently applies to contributions made through an approved clearing house for the purposes of section 23 (reduction of the charge percentage) and section 23A (offsetting late payments). The amendments modify the section so that it also applies to contributions made through an approved clearing house for the purposes of section 15A (salary sacrifice arrangements). [Schedule 7, items 15 to 17, section 23B]
Example 7.1 : Sacrificed contributions do not reduce SG charge and employers cannot use salary sacrificed amounts to satisfy their own SG obligations
Pablo has quarterly OTE of $15,000 which would ordinarily generate an entitlement to $1,425 in SG contributions ($15,000 x 9.5 per cent). He salary sacrifices $1,000 a quarter, expecting his superannuation contributions to rise to $2,425 for that quarter.
However, his employer uses the sacrificed amount ($1,000) to satisfy part of the employer's mandated SG obligation, and only makes a total contribution of $1,425, mostly consisting of the employee's $1,000 salary sacrificed amount.
Under the new amendments, Pablo's $1000 sacrificed contribution will no longer reduce the charge. Therefore, the charge percentage would only be reduced by 2.83 per cent ($425 / $15,000 x 100). As the employer is required to contribute 9.5 per cent of the OTE base, they must contribute an additional 6.67 per cent to meet their minimum SG obligations. The employer has a shortfall of approximately $1,000 (6.67 per cent x $15,000).
As sacrificed contributions no longer reduce the charge Pablo's employer will need to contribute $1 425 (mandatory employer contributions) in addition to the $1,000 employee sacrificed amount, to avoid a shortfall and liability for the SG charge.
Example 7.2 : SG liability to be calculated on the pre-salary sacrifice base and Employers cannot calculate SG contribution on post salary sacrifice OTE base
Consuela earns the same salary as Pablo ($15,000 per quarter) and salary sacrifices the same amount ($1,000 per quarter).
Consuela's employer previously calculated SG liability on Consuela's post salary sacrifice wage ($14,000 instead of $15,000 per quarter). The employer contributed $2,330 per quarter ($1,330 mandated employer contribution + $1,000 salary sacrifice amount) instead of $2,425 ($1,425 + $1,000).
When calculating the amount to be contributed, Consuela's employer must (under the new law) include sacrificed OTE amounts in the OTE base. The OTE base is the sum of OTE and sacrificed OTE amounts.
Consuela's employer's charge percentage would be reduced by 8.86 per cent ($1,330 / $15,000 x 100).
The $1,330 is the amount the employer contributed, and the $15,000 is the correct OTE base that the employer's SG obligation should have been calculated on.
Since 8.86 per cent is less than the required 9.5 per cent, the employer will have a charge percentage of 0.64 per cent under section 19 and a shortfall of $95.
To avoid the shortfall, Consuela's employer contributes $2,425 each quarter (consisting of $1,425 in mandated employer contribution and $1,000 in sacrificed amounts) which is the correct amount.
Example 7.3 : Amounts that are salary and wages but not OTE
Lucille is paid $20,000 in salary and wages a quarter, which includes overtime of $5,000. She enters into a salary sacrifice arrangement of $2,500 of overtime pay per quarter. Her OTE is $15,000 a quarter (as overtime is not included in OTE).
Lucille's total employer contribution should be $3,925 ($1,425 mandatory employer contribution + $2,500 sacrificed amount for the quarter).
Lucille's employer contributes $3,925, with $1,425 being the amount relevant for reducing the charge. The sacrificed amount is not added into the base of OTE, to the extent it includes overtime. This is because it is not a sacrificed OTE amount, since the salary sacrifice arrangement results in no reduction in the employee's OTE.
Lucille's employer's SG charge percentage is reduced by the following amount:
Therefore, the SG charge percentage is reduced to zero and there is no shortfall to pay, which is the correct outcome since overtime should be excluded from OTE.
Application and transitional provisions
The amendments made by this Schedule apply in relation to working out an employer's superannuation guarantee shortfall for quarters beginning on or after 1 July 2020. [Schedule 7, item 18]