On 28 October 2019, the Australian parliament approved new legislation intended to end the current loophole that allows employers to use their employees’ salary sacrifice contributions to reduce their minimum compulsory Superannuation Guarantee (SG) contributions.
The bill entered into effect on 1 January 2020.
Background
The Treasury Laws Amendment Bill 2019 amends the Superannuation Guarantee (Administration) Act 1992.
Salary sacrifice, also referred to as salary packaging, is an agreement negotiated between the employer and the employee. The employee agrees to forgo part of their future entitlement to salary in return for benefits of similar value provided by the employer.
Key details
Prior to 1 January 2020, salary sacrifices elected by the employee for SG contributions were treated as an employer SG compulsory contribution. In addition, all sacrificed salary amounts were used to reduce the base amount on which the SG is calculated. The previous regime is estimated to have cost employees in Australia who opted for SG salary sacrifice around AUS 1.5 billion in retirement savings in the 2017 tax year.
On 1 January 2020, any salary sacrifice amount elected by the employee to SG contributions can no longer be used by the employer to reduce its minimum mandated SG contribution of 9.5% of employee’s ordinary time earnings. The employer is now required to pay its minimum superannuation guarantee contributions in addition to the salary sacrifice amount elected by the employee to SG contributions.
In addition, employers are no longer allowed to reduce the base amount on which SG contributions are calculated by any salary sacrificed amount. Therefore, the SG calculation method based on employee taxable salary is now prohibited.
Next steps
The new law will significantly increase the SG savings of employees who used salary sacrifice arrangements elected to SG contributions.
Employers should:
- Ensure that their payroll is compliant with the new calculation rules before the next quarterly due date of their SG contributions to avoid any SG noncompliance penalties.
- Amend their employee salary sacrifice agreements in accordance with the new law.
- Consider publishing an internal communication to explain the change.