From 1 January 2020, the rules for calculating the 9.5% minimum super contribution for employees who salary sacrifice to superannuation have changed. This may result in an obligation to make an increased level of contributions.
The Changes
Employees often enter into a salary sacrifice arrangement with their employer, where they forego an amount of cash salary in exchange for the employer providing benefits of a similar value, such as a car or child care benefits. In particular, it is very common for salary to be sacrificed in exchange for the employer making additional contributions of the same amount to a super fund for the benefit of the employee.
Until recently, the law has permitted employers to calculate their minimum super contribution on the basis of the 9.5% of the employee’s ordinary time earnings after deduction of the sacrificed amount, and to treat the salary sacrifice contributions as part of their minimum contributions.
For any quarters beginning on or after 1 January 2020, in order to avoid a superannuation guarantee shortfall, an employer must contribute at least 9.5% of an employee’s “ordinary times earnings base” to a complying super fund. An employee’s ordinary times earning base is the employee’s ordinary times earnings plus any amounts sacrificed into superannuation that would have been ordinary times earnings but for the salary sacrifice arrangement. Further, salary sacrificed contributions cannot be counted towards the 9.5% minimum contribution.
It is a quirk of the super law that if an employer fails to make the minimum 9.5% contribution for an employee for a quarter, the shortfall on which the super guarantee charge is calculated is based not on the employee’s ordinary time earnings, but on their salary or wages, which is usually a larger amount. From 1 January 2020, the shortfall will be calculated on the basis of the employee’s “salary or wages base”, which is their salary or wages plus any amounts sacrificed into superannuation that would have been salary or wages but for the salary sacrifice arrangement.
These changes only apply to salary sacrifice arrangements involving superannuation contributions. An employee’s ordinary times earnings base will still be reduced by amounts salary sacrificed for other benefits, such as a car.
Example
Brian is entitled to a cash salary of $15,000 in the quarter ending 31 March 2020. He agrees with his employer to salary sacrifice $3,000 to superannuation.
Before the changes
Brian’s employer could have calculated his 9.5% minimum super contribution as ($15,000 - $3,000) x 9.5% = $1,140.
Further, if the employer treated the $3,000 salary sacrifice contributions as superannuation guarantee contributions, the employer would have no obligation to make any further contributions for Brian.
From 1 January 2020
Brian’s employer must use Brian’s ordinary time earnings base, which includes amounts salary sacrificed to superannuation, to calculate his 9.5% minimum super contribution, which would be $15,000 x 9.5% = $1,425.
The employer must make this contribution in addition to the salary sacrificed contributions of $3,000.
The total of contributions required under the new rules is therefore $1,425 SGC contributions + $3,000 salary sacrifice contributions = $4,425.
What you Need to do
Employers who have entered into superannuation salary sacrifice arrangements with employees should review their payroll set ups, to ensure the super contributions made for the benefit of these employees are at least 9.5% of each employee’s ordinary times earnings base, and that these contributions are in addition to any salary sacrificed contributions. In some cases it might be necessary to renegotiate salary sacrifice arrangements with employees.
If you have any concerns about your salary sacrifice arrangements or any questions about these changes to Superannuation please feel free to contact your Nexia Advisor.
