There is a change to the way in which super guarantee contributions are calculated. Employers should review their calculation practices to ensure conformity with the law.
Recent changes made to the Superannuation Guarantee (Administration) Act 1992 (SGA) by the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Act 2019 (the amending Act) affect the way in which employers must calculate superannuation guarantee (SG) contributions in order to meet their statutory obligations. The changes will apply to quarters beginning on or after 1 January 2020.
More specifically, the statutory formula for working out whether an employer has avoided the SG shortfall for a quarter has been amended to ensure that employers do not use employees’ salary sacrificed super contributions to reduce the minimum required SG contributions for employees.
Use of Salary Sacrificed Super Contributions to meet Statutory Contributions
The change to the formula means that an employer will not be able to treat a salary sacrificed contribution as part of the employer’s minimum SG contribution for quarters beginning on or after 1 January 2020. It follows that, going forward, employers whose past practice has been to rely on the salary sacrifice amounts to meet their SG obligations will have to make actual contributions additional to any salary sacrifice amounts.
Furthermore, when working out the minimum SG contributions which an employer is obliged to make, the SG rate (currently 9.5%) must be applied to the employee’s ordinary time earnings base (OTE base), which is the sum of the employee’s ordinary time earnings (OTE) and any sacrificed OTE. Prior to the legislative change, the minimum SG contribution could be calculated on an employee’s OTE rather than on the sum of employee’s OTE and any sacrificed OTE.
The ATO provides the following example to illustrate the calculation of the SG contribution before the change and adjustment which the employer must make to ensure that salary sacrificed amounts are included in the employee’s OTE base:
Sharon earns $2,000 a week and has an effective salary sacrifice agreement with her employer to sacrifice $500 to her superannuation fund each week. Sharon’s salary only comprises OTE amounts.
Sharon’s employer previously calculated his SG liability on the after salary sacrifice wage per week of $1,500 ($2,000 – $500). This amounted to contributions totalling $142.50 ($1,500 × 9.5%) to be made to Sharon’s superannuation fund to satisfy the employer’s SG liability. From 1 January 2020, Sharon’s employer must calculate the SG liability on her OTE base which includes sacrificed OTE amounts.
To meet his SG obligation under the new law, Sharon’s employer must contribute $190 to Sharon’s super fund ($2,000 × 9.5%). This is in addition to the $500 Sharon salary sacrifices each week.
The salary sacrificed amounts are paid to Sharon’s super fund each week under the salary sacrifice arrangement. However, the employer only needs to pay the SG contributions to Sharon’s super fund by the applicable quarterly due dates.
The example also reflects the first point – Sharon’s employer is not able to treat any part of the $500 salary sacrifice payment as meeting the employer’s statutory obligation to make the $190 superannuation contribution.
Note that, as overtime is not ordinary time earnings, where an employee sacrifices overtime remuneration as contribution to superannuation, this amount will not be sacrificed OTE. The sacrifice of overtime remuneration is illustrated in Example 7.3 of the Explanatory Memorandum (EM) for the Bill which was enacted as the amending Act.
Calculation of Super Guarantee charge – the super guarantee shortfall component
The purpose of the legislative change is to ensure that super guarantee contributions are calculated on the pre-salary sacrifice OTE of an employee. In conformity with this approach, where the correct employer contribution for a quarter has not been made on time, the SG shortfall (which is included in the super guarantee charge payable by the employer to the ATO for distribution to the employee) is calculated by reference to broader concept of salary and wages, which for quarters on or after 1 January 2020 will be the sum of:
- the total salary or wages paid by the employer to the employee for the relevant quarter – ‘the total quarterly wages’; and
- any salary or wages amounts of the employee for the quarter in respect of the employer that have been sacrificed into superannuation – ‘the sacrificed shortfall wages’.
Where an employee derives excluded salary or wages
Certain wages or salary (viz ‘excluded salary or wages’) do not give rise to an employer obligation to make super contributions. Excluded salary or wages include:
- wages/salary paid to a part-time employee under 18;
- wages/salary paid to an employee to whom an international social security agreement applies; and
- wages/salary paid to an employee who earns less than $450 in a month.
Where an employee salary sacrifices an amount, which if the amount had been paid to the employee would have been excluded salary or wages, such sacrificed amount does not form part of the calculation (as the case may be) of the sacrificed OTE or the sacrificed shortfall wages. (Discussed in the EM at paras. 7.26 and 7.18 respectively.)
The SGA originally provided (and following enactment of the amending Act, will continue to provide) for the reduction of the OTE and the total quarterly wages by the relevant amount of the excluded salary or wages.
In relation to which quarter is a salary sacrificed amount used to calculate an employer contribution?
Sacrificed salary or wages (i.e. sacrificed OTE and the sacrificed shortfall wages) are taken into account for the quarter to which the sacrifice arrangement relates and not for the quarter in which the sacrificed amount is contributed to the employee’s superannuation fund. (Discussed in the EM at paras 7.27 (calculation of OTE base) and 7.20 (calculation of superannuation guarantee shortfall).)
If the sacrificed amount is used to calculate the employer’s contribution for a quarter but the sacrificed amount is subsequently paid to the employee in a later quarter rather than being contributed to the employee’s super fund, the payment in the later quarter is disregarded for purposes of calculation of the employer’s contribution in respect of the later quarter, in order to avoid double counting. (Discussed in the EM at paras 7.27 and 7.20.)
Need for employees to review their superannuation salary sacrifice arrangements
While employers will need to review their calculation/payment of superannuation contributions to conform with the legislative change, employees will also need review their salary sacrifice arrangements. Employees will need to ensure that the total amount being contributed to superannuation (i.e. the sum of compulsory and sacrificed super contributions) accords with their wishes. In particular, employees will need to consider whether the employee’s annual concessional contribution cap for amounts contributed to super will be exceeded if action is not taken to reduce the salary sacrificed component.
Employers who have hitherto not, in fact, been making contributions in conformity with the changes and will be contributing more into super from 1 January 2020 should consider alerting their employees to the mandated increased contribution, so employees can take advice on whether their salary sacrificed amounts should be reduced.
Employees whose combined compulsory and sacrificed contributions into super exceed the cap may want to reduce the sacrificed amount and increase the cash payment of salary/wages (with accompanying increase in PAYG) rather than paying excess contributions tax. Employees whose wages/salary are agreed as a packaged amount inclusive of super with the result that any increase in the employer contributions will reduce their cash component, may want to reduce their sacrificed amount in order to preserve the existing level of the cash component. As a practical matter, employers will need to factor the communication and revision of salary sacrifice arrangements into their salary/wages payment processes to ensure any employee’s desire to avoid exceeding the concessional contributions cap for 2019-20 and the employee’s desired cash component is achieved in a timely way.
A note of caution
The signposting on the ATO website at the page ‘Super Guarantee payments’ (part of the ATO package of material QC 17235 as last modified on 31 Oct 2019) could be confusing. Although the page is accessed in sequence from an initial page outlining the changes in the law, the relevant page appears to state the current law and not the position which applies from (and including) the March 2020 quarter.
Salary Sacrifice Arrangements
Salary sacrifice forms the core of the legislative amendments discussed above. It is possible that some employees will seek to revise their existing salary sacrifice arrangements and you may find a ‘re-fresher’ on the rules for an effective salary sacrifice helpful.
The ATO has provided an updated discussion of salary sacrifice. It looks to the technicalities from the perspective of taxation efficacy and directs attention to some employment contract aspects.
This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. It is not intended to be, nor should it be relied upon as, a substitute for professional advice. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use.