Salary sacrificing loopholes: are you receiving your full benefits?

Camphin Boston | September 2019

Salary sacrifice strategies are a great way to boost retirement savings. But unwelcome loopholes in the law mean some workers may be getting less than they bargained for. Fortunately, the government is taking action to fix this, but in the meantime salary-sacrificing workers should be across this issue to keep an eye on their arrangement and ensure they’re not being short-changed.

Have you heard about the salary sacrificing loopholes that can adversely affect your retirement savings plans? Most workers understand that their employer must make compulsory super guarantee (SG) contributions of 9.5% of their salary and wages. However, things get a little tricky when an employee chooses to salary sacrifice – and it could have unintended consequences.

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 the following two legal loopholes:

  • 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 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.

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 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.

A fix is on the way

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). Further, any salary sacrifice contributions will not count towards satisfying the employer’s obligation to make compulsory SG contributions.

What should workers and employers do?

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.

Review your salary sacrifice arrangement

Now is a good time to check that your retirement savings plan is on track. 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.

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