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Salary sacrifice involves an employee agreeing to reduce part of his or her gross income, in return for which the employer makes a contribution to a superannuation fund on the employee's behalf.
Generally these contributions will be tax deductible to the employer, subject to the maximum deduction limits.
From the employee's view, instead of the amount being taxed at the marginal rate, say 45% plus Medicare Levy if received as salary, it will be taxed at the rate of 15% (or maximum 30% including surcharge) when it is paid into the superannuation fund.
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PRESERVATION |
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From 1 July 1999, all salary sacrificed superannuation contributions are subject to preservation.
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EFFECTIVE SALARY SACRIFICE |
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Whether a salary sacrifice arrangement is effective or not is a matter of fact. With respect to superannuation contributions, the two key elements of an effective salary sacrifice arrangement are that:
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The decision to salary sacrifice both regular income and bonuses must be made before the derivation of these amounts. A decision to classify a bonus as superannuation contributions after the employee has become entitled to deal with the bonus is an ineffective salary sacrifice, and would result in the amount being treated as the income of the employee and taxed accordingly; |
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Any employer contribution which is made to a superannuation fund cannot be made in lieu of an employee obligation to contribute. If the trust deed of the receiving fund requires that the employee contribute at a certain rate, then any salary sacrifice contribution up to the mandatory employee level would be ineffective and considered to constitute income of the employee. |
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WRITTEN AGREEMENT |
The Australian Taxation Office (ATO) has further expressed the view that there needs to be a written agreement between the employer and the employee, outlining the terms and components of remuneration, in order for a salary sacrifice agreement to be effective. |
IMPLICATIONS OF AN INEFFECTIVE SALARY SACRIFICE |
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If a salary sacrifice is deemed to be ineffective, then:
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the amount sacrificed would be reclassified as income of the employee and subject to tax as normal income; |
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there would have been a breach of the employers' Pay As You Go (PAYG) obligations to deduct tax on this portion of the employee's income; and |
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depending on the period of time which had elapsed between the time of the contribution and the ATO deeming the contribution to be salary, the employee could incur taxation penalties as well as interest for late payment. |
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CASE STUDY: EFFECTIVE SALARY SACRIFICE |
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Rohan must lodge a declaration with his employer, a funds manager, notifying the form in which he would prefer to be paid any annual profit sharing bonus for the 2007-08 year of income that he might become entitled to receive. The employer will either credit the amount to his bank account, provide units in a unit trust that his employer manages or make additional superannuation contributions. His preference is to receive units in the unit trust and he lodges the declaration on 30 June 2008.
On 1 August 2008 Rohan's employer decides that he is entitled to a bonus and provides units in a unit trust 1 week later.
Accordingly, his entitlement to the bonus does not exist until 1 August 2008. Rohan's bonus is the subject of a prospective salary sacrifice agreement and his employer is liable to pay Fringe Benefits Tax (FBT) on the benefit provided.
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CASE STUDY: INEFFECTIVE SALARY SACRIFICE |
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Jane is employed by a stockbroker. She is advised that her entitlement to an annual bonus under the corporate performance bonus scheme is $6 000. She is given the choice of having the amount credited to her bank account, receiving units in a unit trust that her employer manages or additional superannuation contributions. She chooses to receive units in a unit trust.
The Tax Act has the effect of deeming that Jane has derived income of $6 000 at the time of payment of moneys to the unit trust because she has not foregone her entitlement to salary or wages prior to the entitlement arising. Jane's employer is not liable to FBT on the benefit provided.
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