Salary sacrificers beware!
by Peter Switzer
Easy come, easy go is a cliché that could be used to explain why the Rudd Government is set to change the rules that govern our super and they could really hit some Australians pretty hard. But wait, there’s more.
Already we have copped some changes in the last Budget and plenty of ordinary super savers could be in for a rude tax shock!
Definitely not “boring”
Last week, I briefly looked at this salary sacrifice conundrum and some people asked for a fuller explanation. As there are more rule changes for super in the wings, I thought I would take a second look at the issue.
Because this is super, many people could do a Homer Simpson and say: “Boring!” However, for anyone into, or are planning to, salary sacrifice and for financial planners advising clients — THIS IS IMPORTANT!
Salary sacrifice defined
If you’re not quite sure what salary sacrifice is, it’s when employees decide to bump up their super contributions directly out of their pay. It’s a great idea as the amount is then taxed at the concessional tax rate of 15 per cent instead of the usual tax rate. This can save some people over 30 per cent in tax. For the employer who puts it in, it’s just like the employer contribution of nine per cent, which is called the superannuation guarantee or compulsory super for employees.
Employees who get as much into super as early as possible can really make their final lump sum amount very healthy when they retire. It has been a great way to save and because super has a pretty good long-term return, some people have used super instead of buying a rental property for investment purposes. Others have used salary sacrifice rather than paying off their home more quickly, which is a very tax-effective strategy to build wealth.
Watch your limits
Recently, accountant Joe Kaleb pointed out a new problem with salary sacrifice, which could kick a few super savers in the butt.
Kaleb said he identified a major issue with salary sacrificing super and monitoring the $50,000 and $25,000 concessional limits, when a medical specialist client who is employed by the public system came to see him.
The concessional contribution limits are the maximum amounts we can put into super using salary sacrifice. They were halved in the last Budget, so now if you’re under-50 the limit is $25,000 and over that age the limit is $50,000.
His client salary sacrificed $12,000 into super in May 2009, but the funds didn’t actually hit his super account until the current financial year. This would be because most employers are only required to remit super contributions on a quarterly basis (that is, within 28 days following the end of each quarter).
Kaleb instructed his client, and had it confirmed by the ATO, that the $50,000 limit is measured in the financial year the fund receives the contributions from the employer and not when the amounts are deducted from his pay. This makes sense in that the super fund would report the contributions to the ATO in the income year the fund “receives” the contributions upon which the 15 per cent contributions tax is paid.
However this creates a problem. It means the salary sacrificer has to watch the limits of $25,000 or $50,000 each year, as there are big tax slugs if you go over the limit. And if you don’t read your correspondence and don’t have an accountant you could be in the dark being penalised on your super for quite some time.
Did you know?
The problem for Kaleb’s client was that he had had some $40,000 so far deducted from his pay this financial year for super salary sacrifice and with the $12,000 from last financial year, he now exceeded the $50,000 cap with the consequence that 31.5 per cent tax is paid on the excess!
But wait there’s more super tragedy.
The other problem for his client is that the nine per cent super guarantee contributions are included in the $50,000 cap with the consequence that 31.5 per cent tax will also be paid on these.
A lot of salary sacrificers might not know this rule and so they might have contributed say $25,000 out of their pay not realising the 9 per cent put in by their boss is also added to their $25,000, which would lead to a tax slug, again!
Kaleb advised his client to contact both his pay office and the super fund with a view to having the past few months’ contributions not yet remitted to the fund reversed and paid to him as salary.
This type of issue would be occurring on a large scale within the health system and also in other industries. It’s very important that employees closely monitor the $25,000 and $50,000 concessional limits when salary sacrificing into super because their employer would not be doing so. Employees need to be aware that super guarantee contributions are included in these limits. The consequence is that tax of 31.5 per cent is paid on excess contributions, which negates the benefit of salary sacrificing into super particularly where the employee is not on the top marginal rate of tax.
Over the next few months the Rudd Government will receive a number of reviews into tax, super and the finance industry and these all could mean changes to our super. Rule changes often penalise people who have made decisions to be diligent and responsible savers for their future retirement. These people are helping the public purse by not being reliant on the state later in life and the Rudd Government better remember this when they make rule changes in the future.
If they are short-sighted they will discourage super saving and push people to property and with our property supply problems they will create a real estate bubble. You only have to look at America now to understand what property price blowouts can do.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
For more on salary sacrificing, check out Joe Kaleb's article here.
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Published on: Friday, November 13, 2009blog comments powered by Disqus