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From 1 July 2020, new rules will come into effect to ensure that an employee’s salary sacrifice contributions cannot be used to reduce the amount of superannuation guarantee (SG) paid by the employer. This change aims to protect employees’ superannuation entitlements and ensure that employers meet their full SG obligations.
Current Rules and Their Limitations
Under the current rules, some employers are paying superannuation guarantee (SG) contributions on the salary amount after deducting any salary sacrificed contributions made by the employee. This means that instead of calculating the SG contributions based on the employee’s full Ordinary Time Earnings (OTE), the employer reduces the OTE by the amount the employee has chosen to salary sacrifice into their superannuation.
For example, if an employee has an OTE of $50,000 per year and decides to salary sacrifice $5,000 into their superannuation, the employer might calculate the superannuation guarantee contributions on the reduced salary of $45,000 instead of the full $50,000. This practice can significantly reduce the overall superannuation contributions made by the employer, as the salary sacrifice amounts are used to offset the employer’s SG obligations.
Currently, employers are required to contribute 9.5% of an employee’s OTE to their superannuation fund. However, they have the discretion to decide whether or not to include the salary sacrificed amounts in the OTE calculation. This flexibility allows some employers to minimize their SG contributions by excluding the salary sacrificed amounts from the OTE, thereby reducing the total superannuation contributions they need to make.
New Rules and Their Impact
Under the new rules, the SG contribution is 9.5% of the employee’s ‘ordinary time earnings (OTE) base’. The OTE base will be an employee’s OTE and any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement. This ensures that salary sacrifice contributions do not reduce the employer’s SG obligations.
Let’s look at an example to illustrate the impact of the new rules:
Pablo has quarterly Ordinary Time Earnings of $15,000, which would ordinarily generate an entitlement to $1,425 in superannuation guarantee contributions ($15,000 x 9.5%). He salary sacrifices $1,000 a quarter, expecting his superannuation contributions to rise to $2,425 for that quarter. However, his employer uses the sacrificed amount ($1,000) to satisfy part of the employer’s mandated SG obligation and only makes a total contribution of $1,425, mostly consisting of the employee’s $1,000 salary sacrificed amount.
Under the new amendments, Pablo’s $1,000 sacrificed contribution will no longer reduce the charge. Therefore, the charge percentage would only be reduced by 2.83% ($425 / $15,000 x 100). As the employer is required to contribute 9.5% of the OTE base, they must contribute an additional 6.67% to meet their minimum SG obligations. The employer has a shortfall of approximately $1,000 (6.67% x $15,000).
As sacrificed contributions no longer reduce the charge, Pablo’s employer will need to contribute $1,425 (mandatory employer contributions) in addition to the $1,000 employee sacrificed amount, to avoid a shortfall and liability for the SG charge.
Ensuring Compliance and Avoiding Penalties
The amendments also ensure that where an employer has not fulfilled their SG obligations and the superannuation guarantee charge is imposed, the shortfall is calculated using the new OTE base. This change reinforces the importance of employers meeting their full superannuation guarantee obligations and prevents the misuse of salary sacrifice arrangements to reduce superannuation contributions.
Employers must review their payroll systems and processes to ensure compliance with the new rules. Failure to comply can result in significant penalties and liabilities for the SG charge. It is crucial for employers to understand the new requirements and make the necessary adjustments to their payroll practices.
The new rules for salary sacrifice and superannuation guarantee contributions are designed to protect employees’ superannuation entitlements and ensure that employers meet their full SG obligations. By understanding the changes and their impact, both employers and employees can ensure compliance and avoid potential penalties. Employers should take proactive steps to review their payroll systems and ensure that all superannuation contributions are calculated correctly under the new rules.
To keep up to date with the latest changes, check the ATO’s website.
