Can salary sacrifice work for your staff?
Salary sacrifice can be a great way for your employees to get a part of their remuneration in a form other than cash, where they agree to take part of their wage as a benefit of some kind, equal in value to the salary it is exchanged for. Having extra money put into super is a popular option. The upside for staff is that income tax is then based only on the reduced amount of salary that results.
However, the amounts contributed to a super fund as part of a salary sacrifice arrangement cannot be accessed until a ‘condition of release’ is satisfied, such as permanent retirement.
If you agree with an employee to go into a salary sacrificing arrangement, the benefits staff get should of course be equal in value to the portion of salary given up. Apart from super, options include a car, shares or payments for expenses such as school fees, child care or home phone costs, for example.
With any fringe benefits, employees may have their own wish list, but you may need to investigate the fringe benefits tax implications
Topping up superannuation is a popular option for salary sacrifice arrangements. There are several benefits for staff going down this path. For starters, any super put away under such a scheme to a complying fund is not considered a fringe benefit, and is not taxed as such.
A bonus for your business is that such super contributions also give you a tax deduction (if the staff member is under 75 years). And for your employee, these super contributions (within cap limits, see link below) and the earnings from contribution amounts are taxed at 15%.
The fly in the superannuation ointment may however be the concessional caps to contributions from employers (which includes the super guarantee amounts and any salary sacrificed amounts).
After July 1, 2014, it is $30,000 if you are 48 or under and $35,000 if you are 49 and over. If contribution caps are exceeded, the excess will be taxed at your personal tax rate plus interest – instead of at the highest tax rate of 47% which was how excess contributions used to be taxed.
Additionally, you will have the choice of paying the excess contributions tax personally through your superannuation fund, or refunding any amount of excess concessional contributions from your fund. An interest rate charge will apply to this refund, calculated back to the start of the financial year.
From a tax point of view, a salary sacrifice deal can be re-negotiated anytime, although with a work contract it is necessary that these arrangements be set up in advance of the employee’s remuneration being earned.