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Ruling

Subject: Superannuation contributions - salary sacrifice

Question:

Are contributions made in respect of an employee salary sacrifice contributions?

Answer:

Yes

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on:

1 July 2009

Relevant facts:

An employee made voluntary 'pre-tax' superannuation contributions (the salary sacrifice amounts) since the commencement of their employment with the employer over five years ago.

The employee is a member of a self managed superannuation fund (the Fund).

The applicant advised that the salary sacrifice amounts were inadvertently made by the employer directly to a company of the employee's choice, despite this being in contravention of the employer's remuneration packaging requirements at the time, which required any such deduction to be made through one of the contracted remuneration packaging providers.

Subsequently, the employer's payroll services were transferred to a centralised payroll service.

The salary sacrifice amounts continued to be made directly to the employee's company of choice by the payroll service provider in contravention of the employer's policy. This continued until the last late in the 2009-10 income year when the employee requested their salary sacrifice amounts be made to an alternative company.

Following the receipt of the request from the employee to change the company, the payroll service provider identified that this was contrary to their policy as the payment was not being made to an approved remuneration packaging provider and treated the salary sacrifice amounts as 'post-tax' contributions.

At all times, however, the employee intended that the contributions be made 'pre-tax'.

The employee states they were not aware that the nature of the deductions had been changed until they addressed the lodgement of their outstanding income tax returns during 2012.

The applicant provided copies of the PAYG payment summaries for the 2010-11 and 2011-12 income years.

In a recent letter dated in January 2013 from the representative of the Fund, it was stated the Fund has received from the employer:

· an amount in the 2010-11 income year, and

· an amount in the 2011-12 income year,

on behalf of the employee. The Fund treated these contributions as taxable employer contributions.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Reasons for decision

Summary

The employee made a salary sacrifice arrangement (SSA) with the employer. Consequently, the employee is only liable for income tax on their reduced remuneration.

The superannuation contributions made by the employer in respect of the employee are considered to be employer superannuation contributions in the relevant income years.

Detailed reasoning

Salary sacrifice

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.

TR 2001/10 defines a SSA to mean an arrangement under which an employee agrees to forego part of his or her total remuneration that he or she would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer providing benefits of a similar value. The type of benefits provided in SSAs by employers to employees includes employer superannuation contributions. The consequence of such an arrangement is that if the salary sacrifice is effective, the employee will only be liable for income tax on the reduced salary.

Paragraph 21 of TR 2001/10 defines an effective SSA as:

· 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.

As noted in the facts, the employee made a salary sacrifice from their pre-tax earnings in exchange for the employer making superannuation contributions for their benefit or on their behalf to a superannuation fund in 2006. The Commissioner accepts the employee's SSA with the employer is an effective SSA.

As the SSA is effective, the employee is only liable for income tax on their reduced remuneration under section 6-5 or 6-10 of the ITAA 1997. This view is reinforced by TR 2001/10, which states at paragraph 31:

An employer's contributions under an effective SSA to a superannuation fund on behalf of an employee are 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.

In this case, the employer provided copies of the employee's PAYG payment summaries for the 2010-11 and 2011-12 income years. It appears that the employer has included the salary sacrificed amounts in the Gross payments.

If the employer now accepts that the payments were made under an effective SSA, the employer will need to amend the employee's PAYG payment summary to:

· reflect the reduced salary at Gross payments and

· include the salary sacrifice amounts as 'reportable employer superannuation contributions',

for each of the relevant income years. Tax withheld will be unchanged, as this was the amount actually remitted.

The employee can then request an amendment to their income tax assessment in accordance with the details show on the amended PAYG payment summary for each of the relevant income years.

The recent letter provided by the Fund's representative state the contributions received on behalf of the employer in relation to the employee for the 2010-11 and 2011-12 income years were treated as taxable employer contributions in the Fund. As these contributions have been correctly treated as employer superannuation contributions, no amendment is required for the Fund's income tax returns for the relevant income years.

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