Salary Sacrifice

Salary Sacrifice

Contents

Introduction

The Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Act 2019 changed the law to ensure that an individual’s superannuation salary sacrifice contributions cannot be used to reduce OTE or count towards a payer’s minimum superannuation guarantee contributions, if the pre-sacrifice payment was salary or wages for superannuation guarantee purposes.

To bring these changes into the scope of STP reporting, the Treasury Laws Amendment (2019 Measures No. 3) Act 2020 requires employers to report salary sacrificed amounts paid to their employees’ superannuation funds.

For STP Phase 2, this means that if employees were formerly (STP Phase 1) not included in the report, as 100% of their payments were sacrificed, including sacrifice to superannuation, those employees must now be reported. For example, if an employee had reportable payments of 50,000 and 30,000 was sacrificed to superannuation and 20,000 was sacrificed to other employee benefits, resulting in taxable gross of zero, this employee may have previously been excluded but must now be reported.

The values permissible for the salary sacrifice type are:

If, however, the payee has sacrificed exempt foreign income, then that sacrificed amount must not be reported discretely and must reduce the YTD amount reported as Exempt Foreign Income.

For OTE purposes, salary sacrifice to superannuation is included, as it would have been OTE, had it not been sacrificed into a complying super fund or RSA. However, other employee benefits (non-cash) are not salary or wages and thus not OTE.

This definition assumes the bottom-up method of salary packaging, as defined in Methods of Salary Sacrifice in Payroll below.

Payments that can be Salary Sacrificed

An effective salary sacrifice arrangement is one where the approved agreement between employer and employee is in place before the payments to be sacrificed have been accrued, earned or are payable. Payments that may be sacrificed are defined in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) are salary and wages defined by:

  • S12-35 – salary, wages, commission, bonuses or allowances paid to an individual as an employee
  • S12-40 – remuneration of company directors
  • S12-45 – salary, wages, and so on, paid to certain office holders

There are some payments that cannot be sacrificed:

  • CDEP – as this is an Australian Government payment to qualifying payees
  • Lump Sum Payments – other than lump sum W (return to work payments)
  • ETPs – regardless of which type of ETP code

Whilst payments may be sacrificed to a complying superannuation fund, other employee benefits may include:

  • Fringe benefits – such as cars, property (goods, land, buildings, shares and bonds) and expense payments (loans, school fees, childcare costs and home phone costs)
  • Exempt benefits – work-related items such as portable electronic devices and equipment

It is critical, therefore, that all payment types reported in STP Phase 2 be reported for their pre-sacrificed value and not the post-sacrificed amount, other than the exception referenced above for Exempt Foreign Income.

The correct ATO derived aggregated gross YTD amount cannot be correct if the post-sacrificed YTD amount of payment types are reported, in addition to the amount of the salary sacrifice. That will double count the salary sacrifice reduction and result in a lower value than the correct taxable amount of total gross that has been declared "true and correct".

This requirement may result in a range of impacts to existing pay codes and computations within payroll solutions, depending on the method of salary packaging used. For example, both paid leave and gross typically remunerate “ordinary time” that may be sacrificed.

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Methods of Salary Sacrifice in Payroll

All references to salary sacrifice in current ATO guidance and rulings assumes that these amounts are positive values in addition to the salary or wages. That is one method of managing salary sacrifice in payroll (bottom-up), but not the only one. There are two methods that may be used in payroll for salary packaging:

  1. Bottom-Up – where the cash component of salary or wages is the post-sacrificed amount after the sacrificed amounts are deducted from the total package value. The salary sacrificed amounts are positive values, additional to the post-sacrificed amount. The pre-sacrificed amount of the salary or wages is a calculated sum amount only.
  2. Top-Down – where the cash component of salary or wages is the pre-sacrificed amount before the sacrificed amounts are deducted from the total package value. The salary sacrificed amounts are negative values, deducted from the pre-sacrificed amount. The post-sacrificed amount of the salary or wages is a calculated sum amount only.

The reason the methods are referenced as such is due to the cash component value. For the bottom-up method, the post-sacrificed amount is the cash component in the package. However, for the top-down method, the pre-sacrificed amount and each of the salary sacrifice types are all "cash components" that result in the post-sacrificed amount.

It is the cash components from which the PAYG is withheld. This automatically addresses the issue of refunds (or positive) of salary sacrifice that may occur in specific circumstances.

In payroll, salary sacrifice pay codes stand alone. That is, they do not reduce the value of other pay codes within the payroll. However, they do reduce the gross taxable amount paid to the payee. In STP phase 1, the independence of the pay codes sometimes resulted in an initial "negative YTD" amount in the pay event, where negatives were permitted. However, with the move to STP phase 2 and the disaggregation of gross model, this issue cannot occur.

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The following tables illustrate this concept, taking these components into account:

  • Pre-sacrificed amount of salary or wages – represents the total package value
  • Salary sacrifice to an approved superannuation fund or RSA
  • Salary sacrifice for other employee benefits – any right, privilege, service or facility provided in respect of employment.
  • Post-sacrificed amount of salary or wages – represents the value of the residual gross or other sacrificed amounts that is the amount subject to withholding
  • Employer obligations of PAYGW, OTE/superannuation liability
Payroll PAYGW OTE

YTD Amount

STP Phase 1 STP Phase 2
Post-sacrificed salary or wages Yes Yes 70,000 INB-Taxable Gross Not reported
Salary Sacrifice – Superannuation No Yes 20,000 Not reported SAW > Salary Sacrifice Type-S (Superannuation)
Salary Sacrifice – Other employee benefits No No 10,000 Not reported SAW > Salary Sacrifice Type-O (Other employee benefits)
Pre-sacrificed salary or wages (Calculated) 70,000 90,000 100,000 Not reported SAW > Gross
Employer Liability     8,550 Superannuation Liability Super Entitlement Type-L (Superannuation Liability)
Bottom Up Method
Payroll PAYGW OTE YTD Amount STP Phase 1 STP Phase 2
Pre-sacrificed salary or wages Yes Yes 1000,000 INB-Gross SAW > Gross
Salary Sacrifice – Superannuation Yes No -20,000 INB-Gross

SAW > Salary Sacrifice Type-S (Superannuation)

20,000 [amount × -1]

Salary Sacrifice – Other employee benefits Yes Yes -10,000 INB-Gross

SAW > Salary Sacrifice Type-O (Other employee benefits)

10,000 [amount × -1]

Pre-sacrificed salary or wages (Calculated) 70,000 90,000 100,000 Not reported Not reported
Employer Liability     8,550 Superannuation Liability Super Entitlement Type-L (Superannuation Liability)
Top Down Method
  • For ease of illustration, the example assumes that only gross (paid attendances) was sacrificed and not paid absences or other payment types that may be sacrificed.
  • Bottom-up calculation of OTE includes the post-sacrificed salary or wages plus salary sacrifice – superannuation but excludes salary sacrifice – other employee benefits. Terminology should reference "includes additional amounts sacrificed to an approved superannuation fund only".
  • Top-down calculation of OTE includes the pre-sacrificed amount of salary or wages less salary sacrifice – other employee benefits but excludes salary sacrifice – superannuation. Terminology should reference "excludes pre-tax deductions to an approved superannuation fund".
  • Bottom-up calculation of PAYGW includes the post-sacrificed salary or wages only.
  • Top-down calculation of PAYGW includes the pre-sacrificed salary or wages less salary sacrifice – superannuation less salary sacrifice – other employee benefits.
  • If the language used when referencing salary sacrifice consideration for OTE purposes only referenced the inclusion of salary sacrifice – superannuation, those using the top-down method would consider the OTE to be 80,000 instead of the correct value of 90,000.
  • Either method will require modifications in payroll:
    • Bottom-up – to ensure the calculated pre-sacrifice amount of salary or wages is output as a notational (non-cash, reporting only) pay code for STP reporting purposes
    • Top-down – to ensure both these amounts are output as notational (non-cash, reporting only) pay codes for STP reporting purposes:
      • the salary sacrificed amounts multiplied by negative one
      • the calculated cash component of salary or wages

Business Models for Salary Sacrifice Management

Some businesses outsource the management of the salary sacrifice arrangements to specialist third party providers. This may be due to cost efficiency, specialist skill, core business deviation or many other reasons.

In these circumstances, the total value of the salary sacrifice amounts is paid to the third-party provider and the detail may not be known about the split between the different types of sacrifice: superannuation or other employee benefits. As such, report the YTD amount of the total sacrifice each pay as Salary Sacrifice Type-O (Other employee benefits) until the EOFY when the separate types are available to correct the reported amounts. The correction must occur on or before finalisation. If, however, the specific types of sacrifice are known, report those amounts against the relevant types each pay.

Note: the super liability must be based upon, at least, the minimum OTE requirement that includes both salary or wages and the salary sacrifice – superannuation amounts.

The following table outlines the reporting of the salary sacrifice amounts, assuming:

  • Annual salary or wages of 100,000 – Payee Gross
  • Monthly paid (100,000 ÷ 12 = 8,333.33) from PP10 of 12 pays
  • Salary sacrifice to superannuation of 20,000 per annum (20,000 ÷ 12 = 1,666.67)
  • Salary sacrifice to other employee benefits of 10,000 per annum (10,000 ÷ 12 = 833.33)
  • As outsourced model must use pre-sacrificed salary or wages, as component of salary sacrifice that is paid to a super fund is not known by the employer, then this scenario will show the in-house model using the same base for OTE
  • Both business models: in-house and outsourced
Pay Period Payee Gross (Pre-sacrifice Salary or Wages) Salary Sacrifice - Super Salary Sacrifice - Other Super Liability
In House (Available each pay)
10 of 12 83,333.33 16,666.67 8,333.33 7,916.67
11 of 12 91,666.66 18,333.33 9,166.67 8,708.33
12 of 12 100,000.00 20,000.00 10,000.00 9,500.00
Pay Period Payee Gross (Pre-sacrifice Salary or Wages) Salary Sacrifice - Super Salary Sacrifice - Other Super Liability
Outsourced (Available at EOFY)
10 of 12 83,333.33 Not reported 8,333.33 7,916.67
11 of 12 91,666.66 Not reported 9,166.67 8,708.33
12 of 12 100,000.00 Not reported 10,000.00 9,500.00
Correction 100,000.00 20,000.00 10,000.00 9,500.00
  • Payee Gross (pre-sacrifice salary or wages) PP10 (100,000 ÷ 12 × 10 = 83,333.33). PP11 (100,000 ÷ 12 × 11 = 91,666.67)
  • Salary sacrifice to super per annum. PP10 (20,000 ÷ 12 × 10 = 16,666.67). PP11 (20,000 ÷ 12 × 11 = 18,333.33).
  • Salary sacrifice to other employee benefits. PP10 (10,000 ÷ 12 × 10 = 8,333.33). PP11 (10,000 ÷ 12 × 11 = 9,166.67).
  • For the example, the super liability has been calculated on the pre-sacrifice salary or wages, as a policy decision by the employer, in excess of the legislated OTE.

This scenario is illustrated by the following diagram:

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Refunds of Salary Sacrifice

There are circumstances where the salary sacrificed amount may have been made in error, such as for:

  • Overpayments – where the salary or wages were more than should have been paid to the employee. For example, when late notification is received that the employee has gone on extended leave without pay, effective from a prior pay period or financial year, which has already been paid to the employee.
  • Data Entry Errors – where the salary sacrifice was created in error, or for the wrong amount, or for the wrong period of deduction.
  • Incorrect Estimates – where the salary sacrifice may have been established to cover a specific benefit, whose value has changed or been over-estimated for deduction.

These circumstances may result in a refund of the salary sacrifice amounts, reducing the YTD amounts reported in STP. However, when key factors for reporting change, these may result in a negative YTD amount, such as:

  • Change of ABN/Br within an economic group on the same payroll
  • New financial year

A refund of a salary sacrificed amount is taxable income. Given that, regardless of the salary sacrifice method used, a salary sacrificed amount is reported as positive in STP, if a refund of salary sacrifice occurs, this may be reported in STP as a negative YTD amount and is subject to withholding, if the refund amount is in excess of the existing YTD positive amount.

The following scenario outlines a refund of salary sacrifice for an in-house arrangement:

  • Using the details of amounts from Table 14 - Outsource provider
  • Refund of sacrifice to superannuation of 2,000.00 for the prior financial year
  • Refund of other employee benefits of 1,000.00 for the prior financial year
  • The refund of the sacrifice occurred in the first pay of the next financial year.
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