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Self Managed Super Fund (SMSF) Article
Salary Sacrifice Contributions

By Tony Negline.

This article may be out of date.

16th February 2005

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Without tax concessions superannuation would be pointless.  Why would anyone contribute to an investment vehicle that for many years denies you access to your money without some good incentives?

The tax concessions for super potentially happen at different stages – when the contributions are made, during the life of the investment and when the money is withdrawn.

There are four different concessions at the contribution stage – tax deductions for employer contributions, tax deductions for member contributions, a rebate for spouse contributions and the government co-contribution.

Each of these concessions has their own qualification criteria.  This article will concentrate on the concessions available when employer contributions are made and what they have to do to ensure they can access these concessions.

Employers are allowed a tax deduction for super contributions made either to fund retirement benefits for employees or to fund death benefits for the employee’s dependants.

An employer will not be allowed a deduction unless an employee is engaged in producing income for the employer or is engaged in the business of the employer.  Directors are specifically defined as employees hence an employer would be allowed a deduction for contributions made for these people.

Before contributing to a fund for the first time, an employer must take reasonable steps to obtain written confirmation from the super fund that the fund is a resident regulated super fund and can accept employer super contributions.  A resident regulated super fund is a fund that is controlled in Australia and the trustees of that fund have irrevocably elected to be bound by the super laws.

Any employer who doesn’t bother with this step is risking loosing the tax deductions for all contributions made to that fund. 

Not getting a tax deduction for employer super contributions would be bad enough but without this information an employer might also have to pay Fringe Benefits Tax for contributions paid to the fund.  Clearly employers offering their employees Choice of Fund after 1st July 2005 should take careful note of this point and make sure that they have this document on file for super contributions made to a fund chosen by an employee.

An employer will not get a tax deduction for super contributions made for an employee who has turned 70 and those contributions are made 28 days after the month in which the employee turned 70.

An employer’s ability to claim a deduction for an employee may be limited if the business is subject to the Personal Services Income provisions.

Employees who receive a salary package often have to decide whether or not they should sacrifice some of their salary by increasing their contributions to super – hence the term ‘salary sacrifice’.

Under Tax Ruling 2001/10 the ATO has provided some clear guidance.  Salary sacrifice arrangements will only be valid where an employee agrees to receive ‘salary’ as some other type of benefit before the entitlement has been earned.  An employee should therefore only agree to sacrifice future remuneration because an entitlement will have been earned even if it would not be paid until a later time.

When a salary sacrifice arrangement is not structured properly, the employee will be deemed to have been paid salary and Pay As You Go tax would be payable by the employee.

The tax ruling says that as far as the ATO is concerned, employees are free to sacrifice as much as they like however the ruling goes on to warn employers that they meet all obligations, including minimum salary levels, of industrial awards or agreements that govern their workplaces.

It is important to realise that under a salary sacrifice arrangement, although the employee has foregone the salary, the contribution is deemed to be an employer contribution and is taxed in the year it is made.

Salary sacrifice arrangements are potentially very tax effective for investors who have average tax rate is greater than the upfront taxes imposed on the employer contributions.  Based on the income tax rates that have applied since 1 July 2004, this includes anyone who earns more than $26,500 and doesn’t have access to any rebates such as the Family Tax Benefit.

Salary sacrifice looses some of its attraction for anyone who has taxable income of at least $121,075 - the 2004/05 figure when the maximum super surcharge (10%) becomes payable.

Because of the potential tax penalties, an investor who expects to have a benefit greater than their Reasonable Benefit Limit needs to think very carefully about making large salary sacrifice contributions.

For all other situations, an employer’s tax deduction for super contributions is limited to the Aged Based Limits.  The ABLs increase in three age bands – under 35 years of age ($13,934), at least 35 but under 50 ($38,702), and at least 50 ($95,980).  Each year the ABLs are indexed on 1st July by annual movements in Average Weekly Ordinary Time Earnings.

An employee’s age is determined on the date of the last employer contribution made to the fund.  Clearly employees who turn 35 or 50 during a financial year have an ability to increase their tax deductions simply by ensuring an employer contribution is made after their birthday.

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