Superannuation guarantee changes - salary packaging impact

Effective 1 July 2018:

• superannuation guarantee is proposed to be payable on the value of salary packaged superannuation, as well as cash salary; and
• salary packaged superannuation cannot be applied to help meet the employer’s compulsory superannuation guarantee obligation.

Prior to then:

• only the salary component of remuneration is subject to superannuation guarantee; and
• salary packaged superannuation is lumped together with other employer superannuation contributions when testing whether the superannuation guarantee obligations have been met.

1. Superannuation based on pre-packaged salary

Most employers that offer salary packaging, currently pay superannuation on the “pre-packaged” salary amount, ie. prior to the deductions for salary packaged items. This treatment, therefore, means that compulsory superannuation is based on an amount inclusive of salary packaged superannuation, so for these employers, the changes will have no impact.

For example, assume a total remuneration package of $109,500 including superannuation. The employer’s current policy will be consistent with the legal requirement after 1 July 2018 and will include superannuation in the remuneration package as follows:

 2. Superannuation based on reduced salary – total package approach

Some employers allow employees to reduce the compulsory superannuation component of their remuneration package when salary packaging. These employees are no worse off, as their total remuneration package value is maintained, but they have more flexibility regarding how much of their package is made up of superannuation. That is, compulsory superannuation is based on the salary component (as reduced after salary packaging) and the employee has the option to salary package a further amount of superannuation and/or other benefits, as they wish.

For example, the same $109,500 total remuneration package, might be structured as follows:

The proposed changes will remove this option, to the extent that compulsory superannuation must be applied to the salary and salary packaged superannuation components. So the above remuneration package could be changed as follows in order to comply with the proposed new rules:

3. Superannuation based on reduced salary – ‘salary plus’ approach

The type of arrangements towards which the proposed changes are actually targeted, are where the employer pays superannuation on the reduced salary component only and does not maintain the total remuneration package value, and where the employer treats salary packaged superannuation as helping to meet its superannuation guarantee obligation.

So for example, the package referred to above, might have been set at $100,000 salary plus superannuation. This would equate to a total package of $109,500 if the employee did not salary package any benefit. With salary packaging, the total package might be reduced, as follows:

Further, if the employee had salary packaged some superannuation, an unscrupulous employer might have used this to reduce the compulsory contribution amount, as follows:

The proposed changes will fix the second problem, but will not fix the first problem in its entirety. The first problem is only addressed to the extent the employee has salary packaged additional superannuation. Salary packaging of other types of benefits is not taken into account.  

The proposed changes will require any salary packaged superannuation to be identified and compulsory superannuation to be paid on this amount. For instance, the total package might look like the following:

Some other points to note and action to take

• The relevant legislation is currently before the House of Representatives.
• The quarterly ‘ordinary time earnings base’ (comprising ordinary time earnings and salary packaged superannuation) remains subject to the limits of the maximum contributions base – currently $52,760 per quarter.
• Salary packaged superannuation and compulsory employer superannuation both still count towards the $25,000 concessional cap.
• If you currently operate in scenarios 2 or 3 above, consider changing your policies to fit within scenario 1.
• Consider whether you are ready for Single Touch Payroll Reporting – ie. immediate reporting to the ATO of PAYG and superannuation as employees are paid – also coming in from 1 July 2018 for employers with more than 20 employees.