Salary sacrifice reform gives super control to people

Employees cannot cut out their employer when claiming salary sacrifice deductions.

Financial Planners Association CEO Dante De Gori.

Australia’s overhauled superannuation system is now well into its first financial year and with Financial Services Minister Kelly O’Dwyer announcing there will be “no further changes” both investors and advisers are adjusting rapidly to the new rules.

Moreover, though, there is a significant chance that an ALP election win may change investment rules once more. The key changes are likely to be in the areas of negative gearing and capital gains tax rather than super.

On that basis alone it is worth knowing what actually emerged from the controversial overhaul introduced on July 1 which was actually useful and progressive.

In fairly typical fashion the government has managed to promote some of the more obscure enhancements to the system such as the variation on non-concessional caps for downsizing homeowners.

At the same time the government has downplayed the outstanding positive change in the new reforms — the ability to do your own salary-sacrifice contributions.

The nitty gritty

Here’s how it works: salary sacrifice — the nation’s second-most popular tax break for salary earners after negative gearing — used to be linked to the co-operation of your employer.

Unless you were running a small business then to take advantage of the concessional (pre-tax) arrangements — where you can put money into super from your pre-tax salary — your employer had to do the paperwork.

Some employers could not be relied upon to do this either properly or efficiently — but under the new rules you can simply put in your pre-tax contribution — to a maximum of $25,000 into your super account and then claim a full tax deduction on the contribution ... your employer is cut out of the picture.

“The ability to do your own contribution really is a great move — it’s arguably the best things to happen in super for years,” says Doug Turek of Professional Wealth (Turek was recently ranked sixth in The Australian’s Top 50 Financial Advisers list.)

“It means you no longer have to rely on someone in your pay office to do the right thing. Importantly, it also means you control the timing. This has been a long-running problem where contributions could easily fall into the wrong financial year depending on the quality of payroll processes … thankfully all that is over,” Turek explains.

Better still, the new system should cut abuse of superannuation entitlements by rogue employers who have been capitalising on the previous process to either reduce super payments or in the most extreme cases withhold entitlements completely. “It’s a very useful development and it should lift standards across the system,” says Dante De Gori, chief executive of the Financial Planners Association.

DIY deductions

Here’s how the new system deters unpaid super scandals: an employer can cut superannuation guarantee payments owed to an employee by the amount of the salary-sacrifice contribution if they wish to do so. It is hard to believe this is legal but it stands as a loophole in superannuation law.

This rogue practice has been regularly reported in employment disputes though the total amount involved on a nationwide basis is very difficult to estimate.

At its most extreme employees who are unfortunate enough to salary sacrifice at companies which later collapse can also be denied the money they voluntarily contributed.

Crucially, under the new system starting this financial year if an employee chooses to act autonomously and do their own tax-deductible contribution without involving their employer the potential for abuse is sidestepped.

The arrival of DIY super deductions should also be a boon for the increasingly large number of people in the so-called “gig” economy engaged in part-time or contract work.

Earlier this week Association of Superannuation Funds of Australia CEO Martin Fahy told The Australian ASFA was concerned about a potential worsening engagement with super by self-employed workers. On top of the existing population of consulting professionals across Australia, it has been estimated that more than 100,000 Australians make a living from pitching for work on new app-based platforms such as freelancer.com

Turek says the main issue is that investors who move to DIY super contribution tax deductions watch their cashflow so that they can actually get to make contributions inside the financial year.

In other words you need to accumulate the money first and then seek the tax deduction inside the appropriate financial year.

The maximum amount salary earners can contribute from July 1 is $25,000 — and that amount includes the employer’s superannuation guarantee payments of 9.5 per cent of salary.