Salary sacrifice is when an employee agrees to receive some benefit (usually taxable) instead of receiving part of their base salary. SG law only applies if the arrangement qualifies as an SG Guarantee (SGG).
For an SG Guarantee to be valid, three main conditions must be satisfied:
- It is made under an arrangement
- The arrangement requires the employee’s employer to make contributions
- Contributions are needed to be made by standard SG law
Other factors to consider include:
- An employer must provide the benefit
- Employees can’t salary sacrifice superannuation contributions
- Compensation as a result of a termination of employment will qualify as an SG Guarantee.
For an arrangement not to constitute an SG Guarantee, it must be:
- Made via an industrial instrument
- Not required the employer to make SG contributions.
The ATO has provided a list of expected benefits that cannot be salary sacrificed; they include house or apartment, health insurance premiums, school fees, funeral benefit plans, etc.
Receiving SG Guarantee contributions in return for not taking paid annual leave is illegal.
For an arrangement to be an SG Guarantee, it must be under an agreement that requires your employer to make contributions on your behalf by standard process (9.5% of non-super base salary). Under an SGG, salary sacrificing employees are entitled to receive SG contributions simultaneously as their base salary, and this means they’re taxed at a lower rate (a concessional amount), usually 15%.
Salary sacrificing employees who receive less than their SG Guarantee entitlement will need to provide their employers with a Superannuation Guarantee Statement (SGS), which provides evidence that:
- The salary sacrifice amount is equal to or less than the SG Guarantee
- A valid SGG exists.
There are specific requirements for SG contributions that must be met for a valid SGG to be created, one of which is an industrial agreement.
To create an SG Guarantee, the arrangement must:
- Be a written agreement between a specific employee and employer;
- Specify the exact benefit being offered instead of salary
- State the amount of wages being sacrificed
- Identify the standard process that’s required to make SG contributions (9.5% of base or 9.5% of non-superannuation base)
- State the date when the arrangement will begin, end, renew or expire.
SGGs can be terminated in the following circumstances:
- Service-related termination
- The bankruptcy of either party
- Insolvency of employee
- Death of the employee
- Either party ends the arrangement.
In Conclusion, salary sacrificing is the act of exchanging salary for benefits, reducing tax liability, and increasing retirement savings simultaneously. SG Guarantee laws must be met for an arrangement to qualify as a SG; otherwise, it’s considered illegal under SG law. Certain benefits are often offered as part of salary sacrificing, some of which are illegal under SG law.