Benefits of offering salary sacrifice arrangements

An employer who offers salary packaging opens up a range of benefits to themselves and their employees. Employees receive greater value and flexibility from their salaries, which makes your business more attractive and competitive in the recruitment market. Employees are more engaged when they have some input into their remuneration. It lets them know they are valued and provides ongoing incentives to keep them satisfied.

Salary sacrifice requests - contributions to super

Salary sacrificing is a smart way for your employees to grow their super and reduce their assessable income tax since the contributions are made before-tax. You can assist them by agreeing to make the additional super payments into their nominated super fund.  

What is an effective salary sacrifice arrangement?

For a salary sacrifice arrangement to reduce an employee’s assessable income it must meet the following Australian Tax Office (ATO) requirements for an ‘effective’ salary sacrifice arrangement.

  • There must be a written agreement between the employer and employee that clearly documents all terms of the salary sacrifice arrangement. For example, it may include the percentage of salary and any bonus that will be paid into their super.
  • The arrangement must relate to remuneration, including salary, earned in the future.  So it must be established before the work to which the remuneration relates to is performed.
  • The employee’s right to the sacrificed remuneration or salary must be permanently foregone.

You should seek professional tax advice about the business implications of offering salary sacrifice arrangements for your employees.

What do I need to report?

Super contributions made under a salary sacrifice agreement need to be reported on the employee’s PAYG payment summary as ‘reportable employer superannuation contributions’. To determine how much of the super contributions you make for your employees are reportable in this way, refer to the ‘Employer guide for reportable employer super contributions’ on the ATO website.

Tax implications of salary sacrifice contributions

For employers

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

For employees

Salary sacrifice contributions are deducted from an employee’s before-tax salary. The contributions are taxed at 15%, so for an employee with a marginal personal income tax rate higher than 15%, salary sacrificing to super can be a tax effective way for them to grow their super.

Employees wishing to enter into a salary sacrifice arrangement should be aware that super is a long term investment and generally cannot be accessed until they permanently finish work or reach preservation age (between ages 55 and 60, depending on date of birth). 

Employees should also take care not to exceed their contributions caps as this may result in additional tax and charges applying. For details about the contributions caps visit the ATO website.

Preservation of super contributions

Employees should be aware that super contributions and their earnings are preserved, meaning they generally cannot be accessed until their retirement after reaching preservation age. Preservation age is 55 - 60 years, depending on when you were born.

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