One of the great advantages of salary sacrifice arrangements for employees has been that the income sacrificed into superannuation has not been counted as 'income' when determining eligibility for the Government co-contribution, or in determining whether a person satisfies the '10% rule' and can claim a deduction for personal superannuation contributions. However, from 1 July 2009, this will change following the passing of the
Tax Laws Amendment (2009 Measures No 1) Act 2009.
When the Bill was introduced to Parliament, Treasury indicated that the amendments were designed to include salary sacrificed into superannuation for the purpose of determining eligibility for government support via the co-contribution. However, the proposed amendments are significantly broader and are likely to impact the superannuation strategies of a number of people.
Currently, an employee can claim a tax deduction for personal contributions made to superannuation where their assessable income and reportable fringe benefits derived from employment is less than 10% of their total assessable income and reportable fringe benefits. The policy behind the rule is to encourage the self-employed, who generally do not receive superannuation support from an employer, to make contributions to superannuation.
The amendment means that salary sacrifice contributions will continue to be deductible to the employer. However, for the purposes of the 10% rule, the salary sacrificed amount will not reduce the employee's assessable employment income.
A test has been included in the legislation for circumstances where the employee has the capacity to influence the employer, such as with family companies. Superannuation contributions in excess of what the company would have been required to make if the arrangement had have been at arm's length will be counted as income for the purposes of the '10% rule' and eligibility for the Government co-contribution.
The benefits of salary sacrificing will not change for employees who do not satisfy the 10% rule. It will also not effect those who make personal deductible contributions to superannuation but have entered into a salary sacrifice arrangement with their employer to increase their superannuation benefits and reduce their personal marginal tax rate. Perhaps this could be while making a transition to a retirement pension as a means of supplementing income.
What to do
People with current salary sacrifice arrangements and their advisors should:
- consider whether employment arrangements structured to obtain eligibility to make personal deductible contributions or receive the Government co-contribution will continue to have that result from 1 July 2009; and
- review salary sacrifice arrangements to determine whether the strategy continues to have the desired outcomes.
For further information, please contact: