SUMMARY: Salary sacrifice changes forever on 1 July. Are you ready?
One big question that will not be answered until after 1 July is … how many employers will even continue to offer super salary sacrifice for their staff?
From 1 July, 2017, there’s really not a need to do so.
The new rules mean that anyone can make a super contribution with their own money and claim a tax deduction for it – giving the same benefit as received if done via salary sacrifice.
In any case, salary sacrifice has never been compulsory for businesses to offer to their employees. (And this is part of the reason they have introduced the new rules. More on this shortly.)
While many have always done so, many others have refused to (as has been their right), no matter how unfair that might seem. The implementation and complexity could be not significant, which might have stopped many from doing so.
For some, from 1 July, the human resources administration expense might be something that they decide to cut, as employees will have other options to achieve the same result.
What changes on 1 July?
Predominantly, it is the removal of the 10% rule. This is the rule that means that if you earn more than 10% of your income from being an employee, you can only make deductible super contributions via that employment.
But it is also allowing anyone who is eligible to make contributions to super to do it directly to their super funds and to then claim a tax deduction. Make a contribution to your super fund. And if you intend to claim a tax deduction for the contribution, then you can do so when you lodge your tax return.
(What isn’t clear yet is exactly how this is going to work. The most similar way is probably how it works for the self employed, even if that is a little clunky. The self-employed make a personal contribution, then have to inform the ATO that they are going to claim a tax deduction for it, before they lodge their tax return.)
What doesn’t change?
The main eligibility criteria. That is, if you are 64 or under, you can make contributions up to the concessional contributions (CC) cap.
If you are over 65, then you need to meet the work test. The work test involves working for 40 hours during any 30-day period.
And, if you’re 75 or over … bad luck. You can only have SG contributions made on your behalf if they are legally mandated. No salary sacrifice, or additional contributions allowed, sorry.
Why has the “10% rule” been a problem?
It’s been a problem if your employer doesn’t offer sal sac and you want to get more into super than the 9.5% that your employer is legally obliged to pay. If your employer doesn’t offer salary sacrifice, you have been unable to get anything more than your 9.5% into super.
It’s also a problem if you are partly self-employed and partly an employee. You will receive the 9.5% on the employee portion of your income … but you are limited on what super contributions you can make when you’re self-employed.
In other instances, some employers have legally used salary sacrifice contributions to reduce the amount of SG that they are required to pay. If affected employees cancel those sal sac arrangements and start making direct contributions, this will stop employers getting around this loophole.
Under the current rules … what if you earn $100,000 a year and $20,000 of that is from working part-time and the other $80,000 is from your consulting business. You would receive super contributions of $1900 (9.5% of $20,000), but you couldn’t make further contributions, in many circumstances, from the other $80,000.
(If you were a bona fide employee of your own business, paying yourself a salary, then you could pay yourself 9.5% Superannuation Guarantee, plus salary sacrifice for yourself. But many people who are self-employed are not set up to do this.)
Who should continue with salary sacrifice arrangements?
The new rules are great, if you can trust yourself to transfer the money from your savings account to your super fund (via Bpay or direct debit). First preference, obviously, would be for this to be done weekly/fortnightly/monthly, in line with your own pay cycle.
If you can’t, or want to ensure it’s done regularly and exactly, every month, then your employer is probably still best positioned to do that. Sticking with a sal sac arrangement with your employer will hopefully ensure you continue to make the payments.
Once the money is sitting in your bank account … it is definitely harder, mentally at least, to transfer the money to your super fund, knowing that you can’t get it back for years, potentially decades.
Employer-organised sal sac arrangements will generally be very reliable.
Who might be best to do it themselves?
Certainly those who aren’t in a position to use salary sacrifice arrangements, or who are working for employers who don’t offer it.
Also those who are supremely confident that they have the money available to do it and won’t be tempted into spending it.
This will also be handy for those who want to make the contributions regularly, from their own bank account. If it’s $500 a month ($6000 a year), or $300 a week ($15,600 a year), or another amount per fortnight, you will be able to set up direct debits to you super fund, potentially to coincide with your own payday.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: firstname.lastname@example.org . Bruce’s new book, Mortgages Made Easy, is available now.