By Peter Kelly on 4 December 2019
One of the things Mark and I try to achieve with this blog is to keep readers informed about changes in the superannuation, social security and aged care space.
Which brings me to today’s blog….
As most readers are aware, Australian employers are obliged to make minimum contributions to superannuation (super) for their employees. This is known as Super Guarantee.
Currently an employer is required to contribute 9.5% of their employees’ salary (but it is actually based on their Ordinary Time Earnings or “OTE”) to a super fund. Contributions must be made at least quarterly, by 28 January, April, July and October each year.
Employees can ensure their super guarantee contributions are being made in a correct and timely manner by checking their My.Gov account or with their super fund, on a regular basis.
There are two important changes that will be affecting super guarantee contributions from 1 January 2020 and while these changes won’t affect everyone, it is worthwhile being aware of what these are.
With the passing of the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019 (Cth) on 22 October 2019, employers will no longer be able to offset their Super Guarantee obligations against contributions made to super under a salary sacrifice arrangement. Further, where a salary sacrifice arrangement is in place, future super guarantee contributions will need to be calculated on an employee’s salary before the salary sacrifice contributions are deducted.
What does all this mean?
Change 1: Offsetting Super Guarantee
Firstly, a salary sacrifice arrangement is a voluntary agreement where an employee chooses to forego part of their salary and have their employer contribute the foregone portion to super instead. This is a popular tax planning strategy as the amount contributed to super is taxed at a maximum rate of 15%, rather than at the employee’s marginal tax rate, as would be the case if it was paid as salary.
The downside of this is that a contribution made under a salary sacrifice arrangement is regarded as an employer contribution and can be used by the employer to offset their obligation to make further super guarantee contributions.
For example, if we consider an employee who earns $100,000 per annum, their employer is required to contribute $9,500 to super.
However, if that same employee asks their employer to salary sacrifice $10,000 of their salary to super, they will receive a salary of $90,000 and the foregone $10,000 will be contributed to super on their behalf.
The employer still has an obligation to contribute 9.5% of the new salary of $90,000 to super – that is $8,550. But, as the employer has already contributed $10,000 to super under the salary sacrifice arrangement, there is no need for the employer to actually contribute the additional $8,550 to super for the employer. Under this arrangement, the employer wins – the employee loses.
From 1 January 2020, employers will no longer be able to use salary sacrificed contributions to meet their super guarantee obligations.
Change 2: Calculating Super Guarantee contributions
At the present time, an employer can calculate their super guarantee contributions on the reduced salary after deducting salary sacrifice contributions from 1 January 2020 this will no longer be the case.
Turning back to our example, currently an employer is only required to base their super guarantee contributions on the reduced salary of $90,000.
From 1 January 2020, super guarantee contributions must be calculated on an employee’s ordinary time earnings before the salary sacrifice contributions are deducted. Once again, turning back to our example, future super guarantee contributions will be based on $100,000, rather than $90,000.
While many employers have, in the past, calculated super guarantee on the pre-sacrifice salary, and have not offset their super guarantee contributions with salary sacrifice contributions, the new legislation provides clarity and certainty.
Readers are encouraged to take an active interest in their super and ensure their employers are paying the correct amounts on their behalf. Sadly, non-compliance with super guarantee obligations is very common-place.
Even though your employer includes details of superannuation contributions on your pay slips, it is important to check and ensure the contributions are actually being made to your super fund.
With the clarity that has been provided by these recent changes, there is an opportunity for more people to consider salary sacrificing part of their salary to super in order to build their retirement nest egg.
If you are planning to review or establish a salary sacrifice arrangement, consider seeking advice from a financial planner. Contributing too much to super can result in having to pay more tax, and not contributing enough can impact your retirement income.