Salary sacrificing into superannuation is still an attractive strategy, particularly for clients in higher tax brackets.
Two recent developments make it imperative that advisers review their clients’ salary sacrifice arrangements, namely:
- reduced concessional contribution caps; and
- reduced concessional contribution caps; and
- the Tax Laws Amendment (2009 Measures No. 1) Act 2009.
Reduced concessional contribution caps
The recent Federal Budget included a 50 per cent reduction in the concessional contribution caps, effective July 1, 2009.
Clients under age 50 are subject to an indexed cap of $25,000, while clients between the ages of 50 and 74 years have a transitional cap of $50,000 (which is not indexed) until the end of the 2011-12 financial year. From July 1, 2012, those aged 50 years or more revert to the lower cap.
To avoid an additional fund tax of 31.5 per cent superannuation, contributions from all sources must not exceed the caps. These sources include:
- personal contributions;
- employer superannuation fund contributions (including salary sacrifice amounts);
- contributions funding life insurance;
- group life premium cover; and
- contributions deducted from overtime and bonuses.
If a client’s contributions exceed the relevant caps, adjustments should be made. This may mean reviewing and adjusting any salary sacrifice arrangements accordingly.
Tax Laws Amendment (2009 Measures No. 1) Act 2009
This amendment was enacted shortly before the May Budget announcements. The changes have significant implications for various client financial planning strategies, in particular:
- transition to retirement;
- the superannuation co-contribution eligibility of employees;
- eligibility for the Commonwealth Seniors Health Card;
- the Mature Age Workers Tax Offset; and
- the ability to make personal deductible contributions by meeting the 10 per cent rule requirements.
From July 1, 2009, some contributions, referred to as Reportable Superannuation Contributions (RSC), will be included for certain income tests.
RSC will consist of the total of the following:
- Reportable Employer Superannuation Contributions (RESC), covering employer contributions made for employees who are not exempted; and
- Personal concessional contributions, being personal contributions for which a tax deduction is claimed.
Certain income tests will be changed with regard to RSC, while others only with regard to RESC.
The employer contribution exclusions from the RESC definition are determined with reference to the capacity of an employee to influence both or either the size of the contributions, and/or method in which the amount is contributed so that their assessable income is reduced.
Where your client cannot adjust contributions, they will not form part of the RESC amount, and therefore not part of the RSC either.
This could be expected to include:
- superannuation guarantee contributions;
- contributions required under an industrial agreement made at arms’ length; and
- contributions required by Commonwealth, State or Territory law where those contributions would be in excess of the Superannuation Guarantee Contribution requirements.
Similar to ‘a fair go’, the ‘capacity to influence’ is both subjective and ambiguous. Examples have been given in the Explanatory Memoranda of the Budget.
For example, where an employer pays additional 9 per cent contribution to superannuation on amounts above ordinary time earnings (OTE), such as an overtime amount normally exempted from OTE due to a payroll system that does not differentiate between OTE and other remuneration payments, that additional contributed amount would not be considered RESC.
Example 1
Alan’s total employment cost is $109,000, including $9,000 SGC based on OTE of $100,000.
Alan, in the 2009-10 financial year, enters into a salary sacrifice arrangement for his employer to contribute an additional $5,000 of his pre-tax salary to his superannuation fund.
Total employer contributions increase to $14,000, of which Alan’s RESC for the 2009-10 financial year would be $5,000.
Example 2
Jamie works under an industrial agreement requiring that 12 per cent of her OTE is paid to her superannuation.
Jamie’s OTE is $60,000 but she earns an additional $5,000.
Jamie cannot negotiate the terms of her industrial agreement. No additional contributions are requested by Jamie.
Her employer’s payroll system calculates the 12 per cent automatically on her total remuneration including overtime.
Jamie would have no RESC (and therefore no RSC) for the financial year since she had no capacity to influence the contributions made by her employer.
Example 3
Simon, age 52, is self-employed and makes a personal contribution in 2009-10 of $200,000, for which he claims a personal tax deduction of $30,000.
Simon’s RSC for 2009-10 will be $30,000.
Impacts on employers
There are significant impacts on all employers, as they are responsible for reporting these contributions to both the Australian Taxation Office and to their employees.
Employers’ payment summaries to their employees, as well as the annual withholding amount report they provide to the commissioner, will be adjusted so that the employer has an obligation to include details of RESC payments.
Personal contribution deductibility
It has been a common strategy for employees with significant assessable income other than salary, such as capital gains, to salary sacrifice their salary to a level that is less than 10 per cent of their total assessable income. This results in them meeting the definition of an eligible person for the purposes of claiming a tax deduction on personal contributions.
This strategy has been removed by the inclusion of RESC in the calculation when determining a person’s percentage of relevant income that is derived from activities for which they are eligible for Superannuation Guarantee.
From July 1, 2009, less than 10 per cent of the following must be derived from relevant employment activities: assessable income + reportable fringe benefits + RESC.
Example 4
Alex is 52 years old and sells a property with $100,000 assessable capital gain. He earns a salary of $30,000 and puts into place a valid salary sacrifice arrangement to sacrifice $20,000.
For 2008-09 his assessable income is $110,000, which is made up of take-home salary plus capital gain ($10,000 + $100,000).
With $10,000 of assessable income derived from employment making up less than 10 per cent ($10,000 / $110,000 = 9.1 per cent), Alex is eligible to make personal deductible contributions.
For 2009-10, the calculation is based on: assessable income + RESC = salary + RESC + capital gain.
Therefore, Alex’s assessable income plus RESC is $130,000 ($100,000 + $10,000 + $20,000).
With $30,000 of assessable income derived from employment making up greater than 10 per cent ($30,000/$130,000 = 23.1 per cent), Alex is not eligible to make personal deductible contributions.
Effective salary sacrificing arrangements
Some care is required, as a Salary Sacrifice Arrangement (SSA) may be classified as either an effective or an ineffective arrangement.
An effective salary sacrifice arrangement involves determining how the particular tranches of remuneration are to be applied before it has been earned.
In contrast, an ineffective salary sacrifice arrangement occurs when employees decide what to package once income has been earned. This is particularly relevant in regard to bonus payments.
For an SSA to be effective, it must be based on a prospective arrangement, rather than a retrospective arrangement, and a written agreement between the employer and employee, stipulating the terms and components of remuneration.
Client salary sacrifice arrangements should be reviewed for the 2009-10 financial year to avoid exceeding the new contribution caps. (Any reduction of contributions may involve removing high levels of life insurance cover from their superannuation funds.)
Incorporated small business owners and their accountants may need to be informed of the new employer reporting obligations where salary sacrifice arrangements are in place.
Transition to retirement strategies involving large salary sacrifice amounts or eligibility for the Mature Age Workers Tax Offset or qualifying for the Government Co-Contribution should also be reviewed.
Martin Breckon is a technical marketing manager at Aviva.
