Damian Hearn
Technical

Hidden and carried forward salary sacrifice contributions

By Damian Hearn

The reduction in the concessional contribution caps from 1 July 2009 will have a significant impact on clients who have salary sacrifice arrangements. These clients need to be vigilant to ensure the contribution caps are not breached.

As you will know, the government will halve the concessional contributions caps from 1 July 2009. The transitional cap for concessional contributions will also be halved. This cap applies to employees who are aged 50 or more during the year, however this higher cap is not indexed and will only apply until 30 June 2012.

Changes to the contributions caps

 
2008/09
2009/10
Over age 50
Under age 50
Over age 50
Under age 50
Concessional
contribution cap
$100,000
$50,000*
$50,000
$25,000

* The indexed concessional contribution cap for 2009/10 financial year was going to be $55,000.

Exceeding the contribution caps can be easily done

Contribution planning against the reduced concessional contribution caps from 1 July 2009 will now be even harder, certainly for high income earners below age 50. Most importantly, additional concessional contributions being made by employers need to be identified.

Important: Many employers pay additional employer contributions into superannuation on behalf of their employee’s to cover the cost of insurance such as income protection and life insurance. These additional employer contributions are counted towards the concessional contribution cap and need to be taken into consideration by employees when determining the level of their salary sacrifice contributions.

Salary sacrifice contributions are not safeguarded by the superannuation guarantee requirements. Employers are not required to remit salary sacrifice contributions to an employees superannuation account on a quarterly basis (i.e. within 28 days after the end of the financial quarter). This means an employer could remit salary sacrifice contributions annually, therefore the timing of the salary sacrifice contributions can be a cause for concern.

Salary sacrifice contributions are counted against the concessional contribution cap for the financial year in which they are received by a client’s super fund. Most importantly, if the salary sacrifice contributions are received after 30 June the contributions will be carried forward and counted against the concessional contribution cap for the new financial year. The impact of “carried forward salary sacrifice contributions” is highlighted in the following case study.

Case Study

Take the case of Helen (age 44) who is employed as a Logistics Manager with a salary of $100,000 per annum (plus 9 per cent superannuation guarantee). Helen commenced salary sacrificing $41,000 into superannuation at 1 July 2008 and her total employer contributions are $50,000 p.a.

Taking into account the reduction in the concessional contribution cap from 1 July 2009, Helen will reduce her salary sacrifice to $16,000 (i.e. $25,000 - $9,000 superannuation guarantee) to ensure she will not exceed the cap.

Unbeknown to Helen, her superannuation guarantee and salary sacrifice contributions for the June quarter of the 2008/2009 financial year where received by her superannuation fund on 10th July 2009. The salary sacrifice contribution of $10,250 (i.e. $41,000 x 1/4) will be carried forward into the new financial year and counted against the 2009/2010 concessional contribution cap (as shown below) resulting in an excessive contribution tax liability of $3,229.

Exceeding the concessional contribution cap

 
Current Financial Year (2008/2009)
New Financial Year
(2009/2010)
9% SG contribution
$9,000
$9,000
Salary sacrifice amount
$41,000
$16,000
Carried forward salary sacrifice
($10,250)
$10,250
Total concessional contributions
$39,750
$35,520
Contribution Cap
$50,000
$25,000
Excess contribution
$Nil
$10,250
Excessive Contributions Tax
(Excess contribution x 31.5%)
$Nil
$3,229

Even if Helen’s salary sacrifice contribution of $4,000 (i.e. $16,000x 1/4) for the June 2010 quarter are received by super fund after 30 June 2010, the “carried forward salary sacrifice contribution” of $4,000 will not be sufficient to avoid the concessional contribution cap being exceeded for the 2009/2010 financial year.

Be aware: When the transitional concessional contribution cap reduces from $50,000 to $25,000 effective 1 July 2012, advisers will need to be aware of “carried forward salary sacrifice contributions” from the 2011/2012 financial year counting against the contribution cap for the 2012/2013 financial year.

Clients like Helen, who are maximising the concessional contribution cap for the current financial year by salary sacrificing, should be aware of this issue.

It could also impact clients who choose to salary sacrifice a one off bonus received in June 2009 or move between employers who have different remittance dates for salary sacrifice contributions.

In simple terms, a delay in processing the payroll for the end of a financial year (including salary sacrifice contributions) could impact your clients contribution plans post 1 July 2009. Coupling this with the reduction in the contribution caps from 1 July 2009, the carried forward salary sacrifice contributions need to be taken into consideration by financial advisers.

Vigilant monitoring and positive actions from 1 July 2009

To avoid exceeding the contribution cap, clients will need to provide their advisers a copy of their annual statements to cater for the carried forward salary sacrifice contributions (assuming this occurs for each financial year). In fact, your clients should ask their employer to remit the salary sacrifice contributions prior to end of the financial year to avoid this unintended complexity.

If your client is to exceed the concessional contribution cap, they can apply to the Australian Tax Office to have the contribution relocated to another financial year or disregarded. However this can only apply after the event and it does not provide confidence when determining your client’s contribution planning strategy.

Summary

You might consider that only clients who are maximising the concessional contributions cap can be caught out by “carried forward salary sacrifice contributions” and other unexpected amounts. However, it is worth the attention since the reduced contribution caps will conceivably make it easier for the caps to be exceeded. This leaves little room for errors or additional employer contributions when devising a salary sacrifice contribution strategy.