The Federal Government introduced measures to “prevent employers from using their employee’s salary sacrifice contributions to reduce their own superannuation guarantee (SG) contributions and ensure that SG is paid on the pre-salary sacrifice base.” This means that, assuming the legislation gets passed, from 1 July 2018, employers will be unable to use salary sacrificed superannuation contributions to satisfy their SG obligations. This also means many salary sacrifice arrangements may need to be revised by 30 June 2018 to avoid ending up with an SG liability, penalties and potential enforcement orders.
Currently, most salary sacrifice arrangements require or allow an employee to sacrifice some of their remuneration towards superannuation. This is a tax effective remuneration planning option, as rather than the employee paying income tax at marginal rates, the sacrificed amount is effectively taxed at 15 per cent on receipt by the fund, but is treated as an employer contribution and not as an employee contribution. Of course, annual superannuation caps need to be observed to ensure the contribution is not taxed at higher rates, but that is why employees should obtain professional assistance before entering into a salary sacrifice arrangement.
The main changes are set out in Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 2) Bill 2017 and further supported in the proposed Treasury Laws Amendment (Taxation and Superannuation Guarantee Integrity Measures) Bill 2018. The relevant provisions have bipartisan support, although the Improving Accountability and Member Outcomes Bill has been held up in the Senate due to a disagreement over a proposal to have independent directors on the Boards of industry funds. Nevertheless, the intent is clear that come 1 July 2018 or a date soon after that, employers will need to adjust their SG practices to avoid being subject to a range of enhanced penalties, directions and enforcement orders.
These new Superannuation Guarantee rules will:
- Deny an employer using any salary sacrificed superannuation contributions to count towards meeting their SG obligations; and
- Increase the base used to calculate any SG shortfall amount by the sacrificed superannuation amount.
The amendments don’t impact other salary sacrifice arrangements; only sacrificed superannuation arrangements are impacted. The later Integrity Measures Bill then imposes additional reporting obligations on employers to align their treatment with the treatment of ordinary SG contributions.
Practically, as most salary sacrifice arrangements specify a total remuneration amount, which is then sacrificed towards a range of benefits including superannuation, any amount sacrificed towards superannuation will not reduce the employer’s SG liability as of 1 July. Hence, unless such arrangements are renegotiated by 30 June 2018, an employer offering such an arrangement may need to pay both the sacrificed superannuation amount and an SG shortfall equal to 9.5 per cent of a base equal to the employee’s actual (cash) salary. Or, if that base exceeds the current maximum SG contribution base, the maximum contribution base will need to be paid.
Some of the options open to employers with such arrangements are to:
- Pay an additional 9.5 per cent towards superannuation calculated on a revised ordinary times earnings base. On the face of it, this is an increase in effective employee remuneration, but could cause employees and employers problems if this results in a breach of the annual contribution caps for an employee.
- Revise their employment agreements such that superannuation is removed or restricted as a salary sacrifice option, with the total remuneration offered reduced to reflect the superannuation likely to be payable to comply with the new SG laws. Caution must be taken though, as such a revision could result in a tax problem for the employee, a substantial change in employment terms for the employee, or be in breach of other employment/industrial laws. Therefore, advice from a lawyer and your tax adviser will be required before making any revision effective.
This change is not something employers should ignore if they want to remain SG compliant. The range of additional reporting and disclosure requirements, penalty and enforcement options open to the Tax Commissioner (recently released in draft legislation for comment, but expected to be passed prior to 30 June 2018) highlight the level of seriousness employers need to take to adjust for these changes. As a first step, employers and advisers will need to prepare to establish new effective salary sacrifice arrangements by 30 June 2018.
Tony Marks – Partner – Specialist Tax