Both employers and employees need to be aware of the New Rule for Salary Sacrificing to Superannuation that came into effect on 1st January 2020.
Firstly, What is Salary Sacrificing to Superannuation?
Salary Sacrificing to Superannuation is an arrangement where the employee has part of their pre-tax income deducted from their wages and paid by the employer to their nominated superannuation fund.
What are the Advantages of Salary Sacrificing to Superannuation?
Increased superannuation balance: this is an obvious benefit with Salary Sacrificing providing an easy way to boost retirement savings.
Pay less income tax: putting part of gross wages to superannuation will reduce the amount of income tax payable due to a reduction in taxable income.
Lower tax rate: the salary sacrificed amount will have a maximum of 15% contributions tax payable when deposited to the super fund. This is much lower when compared to a rate of between 21% (if earning above $18,200) and up to 45% plus 2% Medicare levy payable by employees on their wages and salaries.
Note: the 9.5% Superannuation Guarantee (SG) paid by employers for their employees is taxed at 15% by the super fund. This is a legal taxation requirement.
What is the New Rule?
Prior to 1st January 2020, it was possible for the employer to include the salary sacrificed amount as part of their 9.5% Superannuation Guarantee (SG) contribution. This could significantly reduce the amount of SG the employer was required to pay for their salary sacrificing employees.
The new law now states the SG must be 9.5% of the employees’ ordinary time earnings (OTE). OTE are gross earnings paid for ordinary hours of work, plus any salary sacrifice contributions made from those earnings.
Put simply, the employer can not longer reduce the amount of SG they contribute by any amounts the employee has salary sacrificed.
Employers who provide salary sacrificing to superannuation should check their SG arrangements to ensure they are contributing the correct amount, particularly where they have previously used salary sacrificed contributions to offset their SG liability.
If in doubt, always contact your accountant or tax agent for any queries or help with Salary Sacrificing to Superannuation.