This blog is to help employers to gain a general understanding of how salary sacrifice works. Please keep in mind that it is not a complete guide. If you have questions about salary sacrifice arrangements that are specific to your industry or situation, we recommend you reach out to the ATO for more information.
Salary sacrificing is a great way to help employees save on their taxes and increase the amount in their superannuation accounts, but it can come with a bit of confusion for employers. Salary sacrifice can look a little different across industries, benefits employees can access can differ, and there are ATO rules a business needs to adhere to so it’s effective and implemented correctly.
What is salary sacrifice?
Salary sacrificing is where an amount is taken from an employee’s gross earnings, so before tax, and allocated to another payment. What this does is decreases the employee’s taxable earnings, so they may drop into a different tax bracket and effectively pay less tax on their gross earnings.
The amount taken from gross wages is then allocated to another payment or account to cover the employee’s expenses, or allocated into a nominated superannuation account. Depending on the type of salary sacrifice, the rules differ slightly, so we’ll take a look at them individually.
Superannuation Salary Sacrifice
When an employee chooses to salary sacrifice into a superannuation account, they will select a set dollar amount or a percentage to salary sacrifice each pay period. For example, it may be $20 into their superannuation account per weekly pay period, or it could be 20% of their total gross wages each monthly pay period.
They may choose to have this go into the same account as their superannuation guarantee amounts are going into, or they can nominate an additional fund. Your payroll software should have the functionality to split the amounts into different accounts.
The employer is then obligated to process the SG and salary sacrifice amounts into their respective accounts. Salary sacrifice is processed the same as SG payments, through a clearing house, and can be processed in the same superannuation batch as SG payments. You also need to ensure that all super that is salary sacrificed is compliant with ATO super processing due dates, the same as SG amounts
Things to keep in mind
- Employees are subject to a cap on their superannuation salary sacrifice, which is currently $27,500 per financial year, meaning this is the maximum they are able to contribute between July 1st and 30th June. If an employee goes over this cap, they may be liable to pay more tax, which is the employee’s responsibility to keep a track of an calculate. Please also note that your employee’s cap may be higher if they have unused cap amounts from previous years (carry-forward concessional contributions).
- As at 1st January 2020, the ATO mandated that salary sacrifice payments made my an employee are not to reduce the employee’s SG amounts. This means that SG (currently 10.5%) must calculate on an employee’s total gross earnings before the salary sacrifice has reduced the gross earnings.
- Ensure that the super salary sacrifice is requested in writing by the employee, and this is kept in their employee file, so there is a record of the request.
Other Salary Sacrifice
Other types of salary sacrificing can go towards several payments, some of which include:
- Car leasing (novated leases)
- Mortgage or rent payments
- A pre-paid debit card used for meals and entertainment
- Electronics such as phone or laptops
- Childcare and other bills
The types of salary sacrificing arrangements an employee is entitled to will generally depend on the industry they are working in, as well as the award or Enterprise Agreement they are employed under. As an example, car leasing or laptop payments are a common entitlement for employees working in corporate businesses, whereas employees working for not-for-profit organisations will be entitled to use it for mortgage or rent payments and pre-paid debit cards.
Many businesses will engage a third-party salary sacrificing company to handle these arrangements, which means the sacrificed portion is paid directly to the third party company who will then allocate the amount to the employee’s lease or account. The third party will communicate the amount to sacrifice each pay period, which may change throughout the course of the agreement. Some agreements will have a pre-tax and post-tax amount to be deducted from employee wages.
In your payroll system, you may be able to set up an additional bank account for this to be deposited into when you upload the ABA file into your bank account to pay your employees. Alternatively, the amount is retained by the employing entity, and is then processed through accounts or finance as a separate payment external to the pay run.
Things to keep in mind
- If your company engages in salary sacrificing for goods and services such as the above, be sure to know about your Fringe Benefits Tax (FBT) obligations. The organisation may need to pay FBT on the benefit provided, and may also ask the employee to make a contribution to reduce this amount.
- Ensure that all arrangements are well documented in an employee file from the start of the agreement, and any changes that are made to the amounts being sacrificed as communicated by a third party are kept for record keeping purposes.
Salary sacrificing can be beneficial to employees when trying to increase their superannuation for retirement, or if they are looking at decreasing how much they are taxed each pay period. For businesses, there are a few important things to remember if you’re currently offering salary sacrifice, or thinking about implementing this in the future:
- Ensure that your payroll system can accommodate the set up of pre-tax, post-tax and additional superannuation amounts to be deducted from an employee’s wages as per ATO guidelines
- All salary sacrifice agreements and changes to the agreements are stored for record-keeping and audit purposes
- Check what salary sacrificing your employees are entitled to based on the industry and award or Enterprise Agreement they are working in, as these can differ quite a lot
- Where a third-party salary sacrificing company is involved, put an emphasis on clear and prompt communication of new agreements and changes to existing agreements
- Ensure that your payroll software is not reducing the SG amounts where an employee is salary-sacrificing superannuation.
About Employment Innovations
Employment Innovations is one of Australia’s leading providers of employment services designed to increase productivity and ensure compliance. Its services and solutions include all the tools that every Australian small to medium sized employer needs – including workplace advice, legal services, payroll solutions, migration, human resource management and HR software.
The information provided in these blog articles is general in nature and is not intended to substitute for professional advice. If you are unsure about how this information applies to your specific situation we recommend you contact Employment Innovations for advice.