Is it time to review your superannuation arrangements and employee remuneration contracts?

Recently in the Federal Budget, the government announced changes that effect employers and employees, notability employee schemes and executive packages. The changes come on the back of the global financial and economic crisis and backlash to large payouts and bonuses for executives.

One change in particular may affect your staff. This is the reduction in Concessional Contribution limits.

Concessional contributions include:

• Employer contributions, SG, salary sacrifice or voluntary employer contributions
• Employer financed benefits (e.g. insurance premiums under superannuation)
• Personal contributions in which a deduction is claimed
• Allocated surplus

The concessional caps that apply:

Age	Concessional Cap "Old"	Concessional Cap "New"
Under 50	$50,000	$25,000
50 and over	$100,000	$50,000

From your perspective as an employer, the reduction in the cap has no tax impact as you are still eligible to claim the deduction for the full contributions paid within the 30 June year end, even if the amount is in excess of the concessional cap for the individual employee. However, from the employees’ perspective, where the cap is exceeded, they will incur an additional tax liability on the excess.

The question that needs to be asked is - while potentially of benefit to you as an employer, is it your intention to penalise your employees or key management by paying excessive contributions and having your employees incur a greater taxation liability? Presumably not, as the retention of valued employees is a key for any business.

The change to the legislation is no doubt unfortunate and these consequences are generally unknown.

As an employer you should consider reviewing your existing arrangements for staff remuneration packages, particularly those that have packages of greater than $275,000. Alternatively if one of your employees derives salary from another employer, you may wish to assist them to review their existing arrangements as they may potentially be receiving more than $25,000 employer superannuation.

A common example is where someone acts as a Director of multiple entities. For example, a Director earning income of $150,000 from 2 businesses. Under this scenario, each employer will need to contribute $13,500 under superannuation guarantee requirements, resulting in a combined total of $27,000, exceeding the concessional contribution cap by $2000.

Where a person's concessional contributions have exceeded the concessional contributions cap in a financial year, the amount in excess of the cap is subject to excess concessional contributions tax. This tax is assessed to the taxpayer at the rate of 31.5% (in addition to 15% tax paid in the fund) and can be paid by the person or alternatively, they may elect for their fund pay it on their behalf. This equates to a tax rate of 46.5%.

Additionally, where the concessional cap is exceeded, the excess is counted against the non-concessional cap. Should the non-concessional cap also be exceeded, a further tax liability of an additional 46.5% will occur.  Accordingly, it is possible that someone who exceeds both their non concessional and concessional contributions limits might be penalised with 93% tax on the excess amounts. 

No doubt employees would not want to have the excess taxed so harshly and may wish to receive the monies as salary or other employer benefits instead of incurring the penalty, to preserve the funds within superannuation.

It is important to discuss this with your employees who may be affected by the contribution level changes.

If you or your staff would like to seek advice in relation to superannuation or other planning needs please contact your Grant Thornton director or manager. 

   
Author: Simon Raines and Dennis Eagles, June 2009

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