• Employers may choose to count the salary sacrifice contributions they make towards satisfying their obligation to make minimum SG contributions of 9.5%.
• Additionally, employers may calculate their 9.5% contributions liability based on the employee’s reduced salary after deducting sacrificed amounts, rather than the pre-sacrifice salary.
The following example demonstrates how this can adversely affect a worker’s savings strategy:
Kayla earns $100,000 per annum from her employer. This means she’s entitled to compulsory SG contributions of 9.5% of her $100,000 salary (ie $9,500). She therefore earns total remuneration of $109,500.
Kayla now arranges to salary sacrifice $10,000 of her salary as extra contributions, reducing her salary to $90,000. But under current laws, her employer is now only required to make compulsory SG contributions of 9.5% of $90,000 (not $100,000); that is, $8,550.
Another problem is that Kayla’s $10,000 salary sacrifice contributions can count towards her employer’s obligation to pay SG contributions. She could receive only $10,000 in total contributions plus $90,000 salary (meaning total remuneration of $100,000) and her employer wouldn’t be in breach of SG laws.
When Kayla entered this arrangement she was expecting to receive contributions of $9,500 plus $10,000, a total of $19,500, while maintaining total remuneration of $109,500 (ie $90,000 salary plus $19,500 contributions). Clearly, the current laws produce a bad outcome for Kayla.
These loopholes possibly exist because salary sacrificing was not a widespread strategy when the SG laws were written.
In practice, many employers aren’t taking advantage of the loopholes and are instead honouring the employee’s intended contributions strategy. However, evidence suggests some employers are applying the rules differently. They may even do this inadvertently through their payroll processes.
If passed, the proposed new laws will only apply to quarters beginning on or after 1 July 2020. All salary-sacrificing workers should check their arrangements now to ensure they’re receiving the full intended benefit of the arrangement. They may need to specifically check the amounts going into their fund.
Employers should also anticipate the passage of the proposed laws and ensure their payroll will be compliant from 1 July 2020.
If you would like to know more please contact one of our accountants on 07 4639 1099 or come in and see us at 14 Russell Street Toowoomba.