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Authorisation Number: 1011980354619

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Ruling

Subject: salary sacrifice of superannuation contributions

Question

Can you salary sacrifice superannuation contributions from a foreign employer into a complying superannuation fund?

Answer: Yes

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian citizen residing in Australia and prior to the 2010-11 income year you were employed with an Australian based Employer (the resident Employer).

In your employment with the resident Employer your terms and conditions of employment included you being able to salary sacrifice part of your remuneration to superannuation.

In the 2011-12 income year, you commenced employment as a full time permanent employee with a non-resident based Employer (the Employer).

You are the Employer's only employee within Australia.

In discussions held between you and the Employer, prior to the 2010-11 income year, it was agreed that you would able to salary sacrifice part of your remuneration as was the case when you were employed with the resident Employer.

Details relating to your remuneration package under the Agreement have been provided which include, amongst other matters, the Employer making employer superannuation contributions and salary sacrificed amounts to a complying superannuation fund (the Fund).

The balance of your remuneration, is transferred by the Employer directly into an account you hold with an Australian based financial institution. It is from this account you intend to periodically transfer the appropriate amount of tax payable to the Australian Taxation Office (ATO).

You are over 55 years of age.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 Subsection 12(11).

Income Tax Assessment Act 1997 Subdivision 290-B.

Income Tax Assessment Act 1997 Section 292-25

Income Tax (Transitional Provisions) Act 1997 Subsection 292-20(2).

Income Tax Assessment Act 1936 Section 23L.

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1).

Reasons for decision

Summary

It is considered that an effective salary sacrifice arrangement (SSA) was entered into between you and your Employer prior to your commencing employment in the 2011-12 income year. Accordingly, you are able to salary sacrifice.

Your remuneration which is salary sacrificed to superannuation, along with the superannuation guarantee payments made by your Employer, are not assessable to you as they represent assessable income of your superannuation fund.

Detailed reasoning

Salary Sacrifice Arrangements

The Commissioner's view on the taxation and superannuation implications of salary sacrifice arrangements (SSAs) is discussed in Taxation Ruling TR 2001/10 (TR 2001/10) Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements. This ruling defines a SSA as being an arrangement whereby an employee negotiates with their employer to forego some part of their salary in return for some other benefit provided by the employer. If the salary sacrifice is effective, the employee will only be liable for income tax on the reduced salary.

The type of benefits provided in SSAs by employers to employees includes employer superannuation contributions.

There are two types of SSAs:

1. Effective SSA an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages.

2. Ineffective SSA an ineffective SSA involves the employee directing that an entitlement to receive salary or wages that has been earned is to be paid in a form other than as salary or wages.

Benefits paid or provided under an effective salary sacrifice arrangement are not salary or wages but are classed as a fringe benefit. Consequently the benefit comes under the Fringe Benefits Tax legislation and is specifically excluded from the assessable income of the employee by section 23L of the Income Tax Assessment Act 1936 (ITAA 1936).

This view is reinforced by TR 2001/10, which states at paragraph 31 that:

An employer's contributions under an effective [salary sacrifice arrangement] to a superannuation fund on behalf of an employee is not assessable income of the employee under paragraph 26(e). The sums contributed have not been allowed, given or granted to the employee, but are paid to the administrators of the fund. Also, the scheme of superannuation and taxation law is such that the contributions are not assessable income of the employee.

Superannuation contributions made by an employer (who derives assessable income or is engaged in a business) under an effective SSA are properly considered as employer contributions to the superannuation fund or retirement savings account (RSA) for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA) and Subdivision 290-B of the Income Tax Assessment Act 1997 (ITAA 1997).

TR 2001/10 considers benefits paid under effective SSAs are not salary or wages within the meaning of that term in subsection 136(1) of the Fringe Benefits Taxation Assessment Act 1986 (FBTAA) and employers, accordingly, have no Pay As You Go withholding liabilities in relation to the benefits.

The contractual relationship between employers and their employees commences with the entering into of a contract of employment between them prior to services being performed. Employment contracts may be amended during the course of an employee's employment to reflect changes made to employment conditions and remuneration arrangements, such as by a SSA.

The Commissioner of Taxation does not give approval for SSAs and cannot comment on how employers and employees make their employment contracts or when they should be amended. However, if both the employer and employee wish to enter into salary sacrifice arrangement, for the agreement to be effective, it needs to be negotiated prior to performing the employment services.

The requirement that a SSA must be negotiated prior to performing employment services, and the form which an agreement/employment contract may take, are discussed in paragraph 48 of TR 2001/10 as follows:

The relationship between an employer and an employee commences with the entering into of a contract of employment prior to personal services being performed. An employment agreement can be entered into between the employer and one employee or a group of employees. The employment contract is usually in writing, although it may be entered into orally. (emphasis added)

Taking into consideration the above, it is evident that in your case an effective SSA was made as you entered into negotiations with your Employer prior to the commencement of employment services with that Employer. Further, in those negotiations an agreement was made, prior to the commencement of the services, which included you being able to salary sacrifice part of your remuneration to superannuation.

Accordingly, the amount salary sacrificed to superannuation in the 2011-12 income year does not represent salary or wages. Further, the salary sacrifice is specifically excluded from your assessable income under the operation of section 15-2 of the ITAA 1997 and 23L of the ITAA 1936.

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