Salary sacrificing into superannuation

Transcription

1 Salary sacrificing into superannuation TB 10 TECHNICAL SERVICES ISSUED ON 1 JULY 2018 ADVISER USE ONLY VERSION Summary Salary sacrificing part of an employee s wage or salary into superannuation can be a tax effective means to accumulate wealth for retirement. However, several issues should be considered before recommending an employee enter into a salary sacrifice arrangement. A salary sacrifice calculator, designed to compare the tax benefits of entering a salary sacrifice arrangement versus taking paid salary, is available via the Technical Services section of OnePath Adviser Advantage. Alternatively, personal tax deductible superannuation contributions can be used to make concessional superannuation contributions, achieving similar benefits to salary sacrifice. Refer to Technical Bulletin 35 Tax deductible superannuation contributions. Benefits of salary sacrifice Tax savings Under an effective salary sacrifice arrangement to superannuation, an employee forgoes part of their wage or salary for employer superannuation contributions. This effectively reduces the assessable income and taxable income of the employee. The additional employer superannuation contributions forms part of the taxable income of the superannuation fund and is generally taxed at a maximum rate of 15% (commonly called contributions tax ). An additional 15% tax (Division 293 tax) may apply to concessional contributions made by an individual with income exceeding $250,000. For additional information, including the definition of income used for Division 293 tax, please refer to Technical Bulletin 59 Contributions. The primary benefit of such a salary sacrifice arrangement is the immediate tax savings (including Medicare levy) generated by the sacrificed income. Sacrificed salary or wages do not form part of assessable income, under an effective salary sacrifice arrangement. How to work out the tax benefits of salary sacrifice When determining how much wage or salary should be sacrificed into superannuation, consider what marginal tax rate would apply to each extra dollar that could be sacrificed and the tax implications of these benefits when entering [ie contributions tax, low income superannuation tax offset (LISTO) and Division 293 tax] and exiting the superannuation system (where applicable). Salary sacrifice/transition to retirement strategy An effective strategy is to salary sacrifice all or part of an employee s wage or salary into superannuation and supplement this lost income by commencing a transition to retirement income stream. Transition to retirement allows a person who has reached preservation age to commence an income stream without having retired permanently from the workforce. Calculations should be performed to determine that the employee will actually be advantaged by implementing such a strategy. For more information, refer to the following resources (accessible from the Technical Services section of OnePath Adviser Advantage): Technical Bulletin 12 Transition to retirement Transition to retirement/salary sacrifice calculator. From 1 July 2017, the benefit of a salary sacrifice/transition to retirement strategy was reduced due to concessional contributions cap of $25,000 and the removal of the tax exemption on investment returns for assets supporting a transition to retirement income stream. The strategy is more advantageous for someone aged at least 60 or has a reasonable tax free component. From 1 July 2018, the catch-up concessional contribution measure may be useful (see later in this Bulletin). Salary sacrifice is added back for a range of taxation and social security benefits Salary sacrificed superannuation benefits are included in the income definitions used to determine eligibility for a range of taxation and social security benefits. Any income definition that includes reportable employer superannuation contributions or reportable superannuation contributions captures salary sacrifice to superannuation. Taxation and social security measures that include salary sacrifice superannuation contributions* within their income definitions include: Income support payments (at any age) Family Tax Benefit parts A and B Commonwealth seniors health card

2 Low income health care card Income / means tested aged care fees Government co-contribution Low income superannuation tax offset Medicare levy surcharge Spouse contribution tax offset Seniors and pensioners tax offset Invalid and invalid carer tax offset Net medical expenses tax offset Child support obligations Higher education loan program (HELP) *Where the employee had the capacity to influence the size or type of contribution. A non-cash (in-specie) contribution made by an employer to a superannuation fund on behalf of an employee is also excluded from attracting FBT. A superannuation contribution for the benefit of a spouse of an employee is not a contribution in respect of an employee and FBT would apply. Are there limits to the amount which can be salary sacrificed? If there are no limits specified in an industrial law, award, workplace agreement or employment contract, then there is no limit to the amount which can be salary sacrificed. Additional tax implications may apply where the concessional contributions cap is exceeded (refer to section headed Concessional contributions cap ). What is a salary sacrifice arrangement? A salary sacrifice arrangement is an arrangement where an employee agrees to forego part of their wage or salary, for benefits of similar value to be provided by the employer or the employer s associate. Effective salary sacrifice arrangements A salary sacrifice arrangement must be in place before the employee has actually earned the entitlement. This is known as an effective salary sacrifice arrangement. The sacrificed salary or wages do not form part of the employee s assessable income. Any superannuation contributions made under an effective salary sacrifice arrangement will constitute concessional contributions of the employee. Ineffective salary sacrifice arrangements An agreement in respect of entitlements that have already been earned will be an ineffective salary sacrifice arrangement. Under an ineffective salary sacrifice arrangement, the sacrificed wage or salary will form part of the employee s assessable income and will be taxed accordingly. Any superannuation contributions made under an ineffective salary sacrifice arrangement will constitute non-concessional contributions of the employee. Salary sacrifice contributions & FBT Generally, fringe benefits tax (FBT) applies where a non-cash benefit is provided to an employee (or an employee s associate) by their employer (or the employer s associate) in respect of the employment of the employee. However, a fringe benefit does not include a cash payment to a complying superannuation fund or RSA in respect of an employee. Industrial law, awards or workplace agreements An industrial law, award or workplace agreement may specify a minimum amount of salary or wages that must be received by an employee. Where the level of non-cash benefits provided reduce salary or wages below the required minimum levels, the employee may still have entitlement (under industrial law) to the underpayment of wages or salary from their employer. As a result, an employer may limit the amount of salary or wages that can be salary sacrificed. What entitlements may be salary sacrificed? Future earnings may be salary sacrificed. Future earnings are salary or wages which the employee has not earned the entitlement. Other remuneration, such as leave payments and bonuses, may be salary sacrificed if the entitlement to be paid these amounts has not been earned. Annual leave/sick leave/long service leave Leave payments during the ordinary course of employment If annual leave and long service leave is taken over the ordinary course of employment, an effective salary sacrifice agreement can be put in place. This is regardless of whether entitlement to the leave payments have accrued or not. Taking leave payments in the ordinary course of employment means the leave payments are received as salary and wages prior to termination of employment (rather than receiving the leave payments as a lump sum on termination). This may allow leave payments to be salary sacrificed where they otherwise would not (because a salary sacrifice agreement in respect of leave payments was not put in place prior to entitlement).

3 Future leave entitlements An employee can enter a salary sacrifice agreement at any time, in relation to future leave entitlements. Generally, a qualifying period has to be met before an employee becomes entitled to leave payments (especially long service leave). An employee can enter an effective salary sacrifice agreement in respect of leave payments where the employee has not completed sufficient service to be entitled to take the leave payment or receive a pro-rated entitlement upon termination of employment. Bonuses Performance bonuses Bonuses may be paid upon satisfaction of certain conditions. These bonuses may be salary sacrificed provided the salary sacrifice arrangement is entered into prior to the conditions being met. Discretionary bonuses A discretionary bonus (eg a Christmas bonus) can be salary sacrificed provided the salary sacrifice arrangement is in place prior to the employer making the decision to pay the bonus. Issues to consider before salary sacrificing Concessional contribution cap Contributions counted against the concessional contributions cap include: Salary sacrifice Superannuation Guarantee Any other employer contributions Personal tax deductible contributions Notional taxed contributions (apply to certain defined benefit funds). Constitutionally protected funds and unfunded defined benefit fund contributions To determine how much to salary sacrifice without exceeding the cap, total concessional contributions must be considered. Salary sacrifice contributions are employer contributions which count towards an individual s concessional contributions cap. What is the concessional contributions cap? The concessional contribution cap for the 2018/19 financial year is $25,000 (regardless of the member s age). This cap applies to total concessional superannuation contributions (i.e. only one limit applies per individual regardless if the individual has multiple employers). Catch-up concessional contributions From 1 July 2018, individuals with a total superannuation balance of less than $500,000 as at 30 June of the previous financial year can carry forward unused concessional contribution cap space from the five previous financial years. This measure provides more flexibility for those with interrupted work patterns or irregular income to make concessional contributions to their superannuation when they have the capacity to do so. The catch-up amounts can be first used from 1 July For additional information refer to Technical Bulletin 59 Contributions. Tax treatment of concessional contributions Generally, concessional contributions are included in the taxable income of the receiving superannuation fund and taxed at a maximum rate of 15%. An additional 15% tax (Division 293 tax) may apply to concessional contributions made by an individual with income exceeding $250,000. For additional information, including the definition of income used for Division 293 tax, please refer to Technical Bulletin 59 Contributions. Breaching the concessional contributions cap Excess concessional contributions are included in the individual s assessable income and taxed at personal marginal tax rates. A 15% non-refundable tax offset is provided to compensate for the contributions tax paid by the super fund. An interest penalty also applies. For additional information on concessional contributions and breaching the concessional contributions cap, refer to Technical Bulletin 99 Excess contributions. Age restrictions The salary sacrifice strategy requires a superannuation fund to accept the contributions. Mandated employer contributions can be received any time; however employer contributions made in accordance with a salary sacrifice agreement are not mandated contributions. Age Less than to less than 75 (that is, on or before 28 th day of month following that in which the employee turns age 75) Able to salary sacrifice to superannuation* Yes Only available where employee has been gainfully employed at least 40 hours in a consecutive 30 day period, in the financial year the contribution is made.

4 *Subject to any limitations place by an employer, industrial law, awards or workplace agreements. Defined benefit schemes Where an employee is a member of a defined benefit scheme, investigations should be undertaken to determine whether salary sacrificing part of the employee s wage or salary to superannuation will affect their final benefit payable from the scheme. Contribution splitting When considering whether an employee should salary sacrifice part of their wage or salary into superannuation, the ability to split these contributions with their spouse should also be considered. Note: Superannuation funds are not required to offer contribution splitting. Where contribution splitting is desired, an employee should ensure that the fund receiving these employer contributions offers contribution splitting to members. Refer to Technical Bulletin 09 Superannuation contribution splitting for more information. Superannuation Guarantee entitlements Under Superannuation Guarantee (SG) legislation the employer is required to provide a minimum level of superannuation support based on the employee s ordinary time earnings (OTE). Salary sacrifice reduces an employee s wage or salary, therefore may reduce the employee s OTE. Generally, there are three possible outcomes: 1. SG remains unchanged The employer may be willing to provide superannuation support based on the pre salary sacrifice OTE. Alternatively, a legal or contractual obligation may require the employer to provide the same level of superannuation support. 2. SG decreases based on the reduced OTE The employer may calculate their SG requirements on the reduced OTE. 3. SG is reduced to nil Salary sacrifice contributions are employer contributions. An employer has satisfied their SG requirements where an employer contribution that is at least equal to the required superannuation support has been made to a complying superannuation fund, scheme or RSA within the required timeframe. Therefore, the salary sacrificed amount may have also satisfied the employer s SG requirements. Example In the 2018/19 financial year, Sam is 52. His salary and OTE is $60,000 pa. Sam enters a salary sacrifice arrangement to forego $10,000 of his salary for additional employer superannuation contributions. Sam s salary/ote is reduced to $50,000. Sam s employer could: 1. Contribute $10,000 in addition to the original superannuation support of $5,700 (9.50% of $60,000). 2. Contribute $10,000 in addition to reduced superannuation support of $4,750 (9.50% of $50,000). 3. Contribute $10,000 only (as this exceeds the minimum SG requirement of $4,750). It is important for the employee to know what impact salary sacrifice will have on the level of superannuation support (SG) provided by the employer. Perhaps this can be negotiated as part of the salary sacrifice agreement. Alternatively, personal tax deductible superannuation contributions can replace salary sacrifice. Refer to Technical Bulletin 35 Tax deductible superannuation contributions. The Government has proposed to add salary sacrifice contributions to OTE from 1 July Furthermore, salary sacrifice contributions cannot be used to satisfy SG obligations under the proposals. At time of print, the legislation is yet to pass. Income replacement insurance Where an employee has an income replacement policy and is considering salary sacrificing into superannuation, the insurance provider should be contacted to determine whether any potential payment of benefits under the income replacement policy could be jeopardised by implementing the salary sacrifice arrangement. Employer contributions and choice of fund An employer does not have to pay salary sacrificed superannuation contributions into the chosen fund of the employee. Choice of superannuation fund allows some employees to choose the complying superannuation fund or retirement savings account into which their employer must contribute their SG contributions. Choice of fund does not extend to employer contributions in excess of the SG requirements.

5 Employees of public benevolent institutions, private non-profit hospitals and public hospitals Some charitable institutions and public benevolent institutions (other than public hospitals) may provide each of their employees with fringe benefits up to the grossed up value of $30,000 (threshold until 31 March 2019) without incurring fringe benefits tax. A private non-profit hospital or public hospital can provide each of their employees with fringe benefits up to the grossed up value of $17,000 (threshold until 31 March 2019) without incurring fringe benefits tax. Some public benevolent institutions, private non-profit hospitals or public hospitals may deduct an amount from the employee s remuneration package that exceeds the actual value of the fringe benefit despite the fact that they will not incur fringe benefits tax for the provision of these benefits. This needs to be considered when comparing non-superannuation and superannuation salary sacrifice for employees of these institutions. Which superannuation fund or retirement savings account? Superannuation legislation does not obligate an employer to pay salary sacrificed superannuation contributions into a fund chosen by the employee. An employee may seek agreement from the employer to include a section specifying into which superannuation fund these additional employer contributions will be paid or a section that provides the employee with the ability to choose any complying superannuation fund or retirement savings account into which the employer is required to pay these additional contributions. To protect the employer from any adverse consequences, the employer may wish to limit any chosen fund to one that can be chosen by an employee in accordance with the choice of fund legislation. Salary sacrifice agreements A salary sacrifice agreement specifies the terms and conditions of the salary sacrifice arrangement that exists between the employee and their employer. As the name suggests, both the employee and the employer must agree to the terms and conditions outlined in the agreement. The following issues should be addressed in a salary sacrifice agreement. Frequency of salary sacrificed superannuation contributions Unlike SG contributions, superannuation legislation does not specify the contribution frequency required for salary sacrificed superannuation contributions. Any salary sacrifice agreement should include a section outlining the minimum frequency that the salary sacrificed superannuation contributions should be made by the employer. Note: It is possible for legislative instruments to dictate the minimum frequency of when these payments must be made (eg. an industrial relations instrument). Calculation of Superannuation Guarantee entitlements As outlined in the Superannuation Guarantee entitlements section, salary sacrifice may reduce the amount of SG required to be provided by the employer on behalf of the employee. An employee may seek agreement from the employer to include a section in the salary sacrifice agreement providing superannuation support on the pre salary sacrifice earnings base. This Technical Bulletin has been produced by ANZ Wealth Technical Services and is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation or needs. Before making a recommendation based on this publication, consider its appropriateness based on the client s objectives, financial situation and needs. ANZ Wealth Technical Services is not a registered tax agent under the Tax Agent Services Act Your client should refer to a registered tax agent before relying on information in this publication that may impact their tax obligations, liabilities or entitlements.