Salary sacrificing loopholes are you receiving your full benefits?


Have you heard about the salary sacrificing loopholes that can adversely affect your retirement savings plans? Under current laws, employees who sacrifice some of their salary in return for additional super contributions may end up receiving less than they expected because of these two legal loopholes:

  • Employers may choose to count the salary sacrifice contributions they make towards satisfying their obligation to make minimum compulsory super guarantee (SG) contributions of 9.5%.
  • Also, 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 p.a. 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), ie $8,550.

Another problem is that her $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.

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. However, evidence suggests some employers are applying the rules differently. They may even do this inadvertently through their payroll processes.

Proposed new laws before Parliament will close the loopholes by requiring employers to pay compulsory SG contributions at 9.5% of the pre-sacrifice amount of salary (that is, the salary actually paid to the employee plus any sacrificed salary). Also, any salary sacrifice contributions will not count towards satisfying the employer’s obligation to make compulsory SG contributions.

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 benefit. They may need to specifically check the amounts going into their fund.

Contact us for assistance in checking your current arrangement or approaching an employer who may be paying less than you expect. We can also help you review your affairs to ensure you’re implementing the most tax-effective sacrificing strategy.

Category: News