Australia Closes Salary Sacrifice Superannuation Loophole
by activpayroll
The Australian government has closed a loophole in the way employers contribute to their employees’ superannuation funds.
In October 2019, the Australian parliament passed the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019, with the intention to amend a ‘loophole’ mechanism which allowed employers to reduce their own compulsory superannuation contributions by using their employees’ salary sacrifice contributions. The arrangement effectively made it possible for employers to ‘short change’ employees that elected to sacrifice salary for their retirement pot, and is estimated to have cost employees in Australia around $1.5 billion in the 2016-17 tax year.
Having passed parliament, the new amendment received royal assent on 28 October 2019: employers must make sure their payroll is ready to implement the changes before their next quarterly superannuation contributions are due.
What is the Salary Sacrifice Loophole?
The salary sacrifice loophole exploited the possibility for employers to choose how to calculate their superannuation guarantee contributions. Before the 2019 amendment, employers were able to calculate their superannuation contributions in a number of ways:
Base salary: Where super contributions are calculated before salary sacrifice deductions for Ordinary Time earnings (OTE) have been made. For example,
- Monthly OTE: $10,000
- Salary sacrifice: $1,000
- Taxable salary: $9.000
- Employer superannuation: $950 (10,000 x 9.5%)
Salary sacrifice treated as employer contribution: Where the salary sacrifice itself is considered an employer superannuation contribution - and which could, if sufficient, amount to the required 9.5% per quarter.
- Monthly OTE: $10,000
- Salary sacrifice: $1,000
- Taxable salary: $9,000
- Employer superannuation: $0 (That being SGC would have been $950 however $1000 Salary Sacrifice is deemed an employer contribution)
How Have Superannuation Contribution Rules Changed?
The 2019 amendment bans employers from redirecting their employees’ salary sacrifice to their compulsory superannuation contributions. More specifically, the law eliminates both the option for employers to use an employee’s taxable salary as their superannuation calculation method, and the option to treat the salary sacrifice amount itself as the superannuation contribution.
Under the new rules, employers can only make their compulsory superannuation contributions on the employee’s OTE base earnings.
The amendment specifies that employees’ OTE base salaries are made up of both their OTE and the amounts that would have been OTE had they not been directed into their superannuation fund as part of the salary sacrifice arrangement.
Issues with Quarterly Payment
Observers point out that the quarterly payment schedule often encourages employers to use superannuation funds for cashflow - and subsequently end up delaying or underpaying their employees super contributions. The quarterly schedule also means that employees often have to wait to find out what compulsory super contributions their employers made for them on previous months of pay.
To address this issue, critics of quarterly super contributions are encouraging the government to align super payments directly with regular wage and salary payments. They point out that many businesses already opt to make super contributions in this way.
Preparing Payroll
The amendment to superannuation regulations will come into effect for quarters commencing on 1 January 2020 or thereafter. Employers in Australia should ensure their payroll teams are prepared for the new superannuation calculation rules, and factor the changes into the quarterly pay schedule.
For more information on Australia’s tax and benefit system, browse our Global Insight Guide to Australia today.