Setting up salary sacrifice arrangements

Throughout the year, and particularly in the lead up to the end of the financial year, your employees may ask you to sacrifice some of their pre-tax salary into their super to help them boost their retirement savings and manage their taxable income.

If you already have a process set up for salary sacrifice, it’s worth making sure it’s set up properly for your employees, or if you’re looking to set one up for your employees, then read on.

Seven things to check off with your salary sacrifice arrangement

1. Is the super fund compliant?

This means that the super fund your employee nominates needs to be set up properly under relevant regulatory bodies.

If you’re unsure, you can check at the Australian Taxation Office (ATO)’s Super Fund Lookup. If the fund your employee has chosen isn’t compliant, then you may have to pay Fringe Benefits Tax (FBT) on any contributions you make.

2. Put it in writing

If your employee wishes to set up a salary sacrifice arrangement, it is worth formalising the arrangement in writing, stipulating what the arrangement is, including the relevant dates, and any terms and conditions. For example, is the arrangement perpetual, a once-off, or is there an end-date after certain payments.

3. Be sure your employee understands the agreement

Whilst having the agreement in writing is one thing, ensuring your employee understands the set-up is important. This means that once the nominated salary amount has been ‘sacrificed’, they will not be able to access it until they reach their preservation age, or meet a condition of release (which you can read about in our Accessing your super article).

4. The salary sacrifice arrangement must be for someone employed by you 

Payments won’t be considered salary sacrifice if set up for someone else, e.g. a spouse of an employee, rather, these payments would be considered a fringe benefit.

5. Remember the limits

Just like your own personal superannuation, your employees have caps on how much they can contribute each year.

Ultimately it is the responsibility of your employee to know their limits on making super contributions, including, salary sacrifice amounts, mandated Super Guarantee contributions and any personal contributions made where they may claim a tax deduction.

Super funds don’t cut off contributions when people have reached certain limits. For concessional (that is, before-tax) contributions, the annual cap for 2020/21 is $25,000.

6. Be sure to keep your records for five years

This is a stipulation from the ATO, so make sure your written agreement is kept on hand.

When you put together your employees' annual payment summaries, you'll need to list the respective salary sacrifice arrangements as Reportable Employer Super Contributions (RESC).

7. Know the tax implications

Employers can generally claim all employer super contributions, including salary sacrifice contributions for current employees, as a deduction for tax purposes.

Read more about claiming tax deductions on super contributions.

Important to note

Salary sacrifice payments are not fringe benefits, so need to be recorded on your employee’s annual payment summary as an employer contribution to super.

The exception is if the payment is made to a non-complying super fund, or to someone who is not an employee, in which case they’ll be treated as a fringe benefit.

Other tips for salary sacrifice arrangements

  • If your employee changes their job situation, e.g., less hours, or a pay rise, be sure to revisit the salary sacrifice arrangement.
  • Having a process for employees to request salary sacrifice arrangements is something you may want to consider. Your employees may ask you at any time to set up, or make changes to, a salary sacrifice arrangement.
  • Concessional (before-tax) contributions limits are in place – for 2020/21 the annual cap is $25,000. This is inclusive of Superannuation Guarantee (SG) contributions.
Paying your employees' super is mandatory but the good news is, you are able to claim a tax deduction for any employer contributions you make.

Whether you own a small business or run a big company, BT Super can help you manage your employer super with ease.

Answer a few simple questions to help you check if you’re meeting your business super obligations and doing the right thing for your people. It only takes about 5 minutes.

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This information is current as at 7 May 2021. 

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