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Rules for an effective salary sacrifice arrangement

ABA Tech Talk

Rules for an effective salary sacrifice arrangement

With EOFY looming, be aware of the rules surrounding an effective salary sacrifice arrangement. Employers have obligations under the Fair Work Act 2009 for deductions made from an employee’s wages. Salary sacrifice arrangements or additional payments into an employee’s super fund are considered deductions and the employer can only deduct money if:

  • the employee agrees in writing to a deduction from their wages and it’s principally for their benefit
  • the employee agrees and the wage deduction is in accordance with the employee’s enterprise agreement
  • it’s allowed by a law, a court order, the Fair Work Commission or an employee’s award.

Salary Sacrifice falls into this category in terms if deductions and also must meet the rules for an 'effective salary sacrifice arrangement'.

This means:

If the arrangement is not effective, super contributions made under the arrangement are:

  • considered a payment of salary or wages – they will be included in the employee's assessable income and subject to PAYG withholding tax
  • considered a personal contribution rather than an employer contribution, which means          
    • The employer won't be entitled to a tax deduction for the sacrificed amount
    • The employer may have underpaid employer contributions and be liable to the super guarantee charge
  • counted towards the employee's non-concessional contributions cap – if the cap is breached, the employee will be subject to additional tax on the contributions.

NOTE: If the contributions are made to a non-complying fund they're considered a fringe benefit.

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Category
ABA
Published
02 Jul 2019
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