Is an Employee’s Super Guarantee Entitlement Affected by Salary Packaging?
The short answer is yes. Under the Super Guarantee (SG) rules, employers are generally required to provide a prescribed minimum level of superannuation support for their employees, on a quarterly basis, to avoid a liability for the SG Charge (SGC). The SCG is non-deductible and is basically equal to the amount of shortfall plus an interest component and an administration charge.
For the 2013 income year, the level of employer support is generally calculated as 9% of the ‘ordinary time earnings’ (OTE), up to a quarterly maximum of $45,750*.
There are two potential impacts of salary packaging on an employee’s entitlements to employer SG support, which are summarised as follows:
1 – Minimum SG support is based on reduced earnings – An employee’s entitlement to SG support is based on their earnings (i.e., OTE) reduced by any salary sacrifice amounts. Therefore, by allowing an employee to salary package, an employer will reduce the minimum SG support they are required to provide an employee who salary packages benefits.
In dollar terms, this means that an employee’s SG entitlement for the 2013 income year is effectively reduced by 9% of the salary sacrifice amount in relation to benefits they are receiving. Therefore, an employee who salary packages fringe benefits is actually reducing the dollar amount of superannuation support their employer must provide.
Example 1: Sandra is employed as a manager and received an annual salary of $120,000. Therefore, for the 2013 income year, Sandra’s employer must provide quarterly SG support of $2,700 (i.e., ¼ of ($120,000×9%)) in order to avoid a liability for SGC.
During the 2013 income year, Sandra started salary packaging a car. The salary sacrifice amount was calculated at $30,000. On this basis, Sandra’s employer is now only required to provide quarterly SG support of $2,025 (i.e., ¼ of ($120,000-$30,000) x 9%).
Consequently, by salary packaging the car, the amount of superannuation Sandra’s employer is required to contribute on her behalf is reduced by $675 (i.e., $2,700 – $2,025) per quarter and results in an annual reduction of $2,700.
2 – Salary sacrificed contributions reduce minimum employer SG support – An employee who salary packages into superannuation effectively reduces the employer SG support they receive. This is because salary sacrificed contributions are treated as contributions made by the employer (not as contributions by the employee) and, therefore, are taken into account in determining if the employer has met their SG obligations in relation to the employee.
In practical terms, this means that an employer may not be required to make additional SG contributions for an employee if the amount of any salary sacrificed contributions satisfies the employer’s SG obligation in relation to that employee.
To avoid this problem, employees should ensure their employment agreement or industrial award contains a clause/condition to ensure that SG support is based on their entire salary package (i.e., the level of SG support an employee is entitled to receive from their employer remains unaffected by any salary packaged superannuation).
Example 2: Roger is employed as a senior manager and received an annual salary of $100,000 plus $9,000 (i.e., $100,000 x 9%) SG support (or $2,240 per quarter).
During the 2013 income year, Roger salary packages $16,000 into superannuation in order to fully utilise his concessional contributions cap of $25,000 (i.e., $25,000 – $9,000). This reduces his cash salary to $84,000 (i.e., $100,000 – $16,000).
Under this arrangement, the salary sacrificed superannuation contributions of $16,000 are taken into account in determining if Roger’s employer has met its SG obligations. In this case, Roger’s employer will not be required to provide any additional SG support because the employer’s minimum SG obligations of $7,560 (i.e., $84,000 x 9%), have been satisfied by the salary packaged superannuation of $16,000.
Roger could have avoided this situation by ensuring that his employment contract required employer SG contributions be based on her total remuneration package of $100,000.
If you would like additional information on Salary Packaging or would like to make an appointment to speak to one of our fully qualified and experienced accountants, please email email@example.com or phone our office on 07 4151 8898.
* Please note that from 1 July 2013, an employer’s SG contribution rate will be gradually increased from 9% to 12% by 1 July 2019.