Individuals with superannuation salary sacrifice arrangements should consider reviewing their arrangements in light of the gradual increase to the superannuation guarantee rate. Salary sacrificing super and the superannuation guarantee rate increase both help to boost retirement savings. However, it is important for individuals to review their circumstances and identify any adjustments to suit their needs.
The superannuation guarantee rate will incrementally increase until it reaches 12%. Individuals who are salary sacrificing superannuation should examine the impact of the superannuation guarantee rate increases and assess whether their existing arrangements are still meeting their needs.
Employer super guarantee rate
The minimum level of quarterly employer superannuation guarantee support has increased from 9.25% for 2013–2014 to 9.5% from 1 July 2014. Therefore employers are required to increase their superannuation contributions on behalf of employees to 9.5% of ordinary time earnings from 1 July 2014. The superannuation guarantee rate will stay at 9.5% until 30 June 2018 before increasing by 0.5% each year until it reaches 12% from 2022–2023 (as proposed in the 2014–2015 Federal Budget).
The super guarantee age limit was abolished from 1 July 2013 (previously set at age 70). Therefore, employers are required to provide superannuation guarantee support (9.5% for 2014–2015) in respect of employees aged 70 and over, unless an alternative exemption applies.
Salary sacrificing superannuation
Salary sacrifice arrangements – via additional employer superannuation contributions above the compulsory employer contributions – can be a tax-effective option for individuals to boost their retirement savings.
The tax benefits available from salary sacrificing into superannuation will largely be determined by the difference between the individual’s marginal tax rate and tax treatment of the contributions in the hands of the superannuation fund. Individuals should consider examining the effectiveness of salary sacrificing arrangements to take into account changes to the individual tax rates and thresholds.
Higher income earners
From the 2014–2015 income year, the effective top marginal tax rate is 49% (including the 2% temporary budget repair levy and 2% Medicare levy) for an individual with taxable income exceeding $180,000. As a result, salary sacrifice arrangements, up to the concessional cap, carry an effective tax concession of 34% (ie the 49% top marginal tax rate less 15% contributions tax) for individuals with taxable income between $180,000 and the high income threshold of $300,000. For taxpayers above the $300,000 high income threshold, the tax concession is reduced to 19% (ie the 49% top marginal tax rate less 15% contributions tax less 15% Div 293 tax).
Higher concessional contributions cap
Tax-effective salary sacrificing arrangements are effectively restricted to the relevant concessional contributions cap. The general concessional cap has been increased through indexation to $30,000 from 2014–2015. A higher concessional contributions cap of $35,000 (not indexed) applies from 2014–2015 for those who are 49 years or over on 30 June 2014. This temporary $35,000 concessional cap will cease when the general cap reaches $35,000 through indexation (expected to be 1 July 2018). As such, individuals should review their salary sacrifice arrangements to take into account the higher concessional caps.
Any excess concessional contributions made on or after 1 July 2013 will be assessed at the individual’s marginal tax rate (including an interest charge to take account of the deferred payment of tax).
The concessional contributions cap applies on a person basis, which means individuals with multiple employers need to be aware that superannuation guarantee contributions from each employer will count towards the individual’s concessional contributions cap. As a result, the effective limit on a salary sacrifice arrangement will be reduced where the individual has concessional contributions from other sources.
Review existing arrangements
If an employee is already salary sacrificing more than 9.5% of their ordinary time earnings as at 1 July 2014, the employer is technically already complying with the higher superannuation guarantee rate of 9.5% and not obliged under the super law to make additional superannuation contributions at the increased rate. However, an industrial award or agreement may require an employer to make superannuation contributions above the standard charge percentage in the superannuation law. Likewise, an employee’s contract of employment or salary sacrifice arrangement may also provide for superannuation entitlement above those specified in the super law.
Accordingly, employees already salary sacrificing above the 9.5% rate (for 2014–2015) should review their employment agreements and salary sacrifice arrangements to clarify that the employer is liable for all payments under the superannuation guarantee regime (at the increased super guarantee rate for the relevant year) on the total remuneration agreed.
Employees may also want to examine the higher contribution caps and assess whether the current arrangements still suit them.
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This discussion is not exhaustive and does not cover all relevant matters. Individuals should seek advice tailored to their circumstances. Please contact our office for further information.