• My Watson Wyatt
• Contact Us
• Investor Relations
• Careers

Australia:

Draft taxation ruling concerning salary sacrifice arrangements

The Taxation Office has issued a draft ruling concerning salary sacrifice arrangements. Although it is still in draft, employers should take note of its contents now. The draft represents the culmination of many years of thinking on this matter, and is consistent with previous official statements. It also states that it will have retrospective effect.

The tax ruling separates salary sacrifice arrangements (SSAs) into two types:

• A retrospective arrangement where an employee directs that a presently existing entitlement to salary or wages be paid in another form.
• A prospective arrangement under which an employee foregoes a future entitlement to salary or wages before that entitlement becomes 'presently existing'. An entitlement becomes presently existing when the services for which the entitlement is to be paid have been performed and may exist even if an employee will not actually receive payment until a later date.

Payments by an employer under a retrospective SSA are assessable income of the employee and hence PAYE tax will have to be deducted. Any such payments to a complying superannuation fund do not qualify as 'employer contributions' and hence do not count for Superannuation Guarantee purposes. They are treated as payments of salary or wages by the employer for the employer's tax deductibility purposes. Payments by an employer under a prospective SSA are not assessable income of the employee and hence PAYE tax does not have to be deducted. Any such payments to a complying superannuation fund count as 'employer contributions' for Superannuation Guarantee purposes. They are tax deductible to the employer as superannuation contributions, up to the prescribed limits.

Importantly, the draft tax ruling states that it will be acceptable for an employee to give the employer a direction to replace future remuneration with superannuation contributions. The draft ruling is not entirely clear on certain aspects of the sacrifice of irregular remuneration, such as bonuses, and Watson Wyatt will be seeking clarification on a number of issues. If it becomes law, the ruling will impact staff at all levels.