Salary sacrificing will soon get easier

Salary sacrifice strategies will be much easier to implement when the new super rules come into force on July 1.

No longer will employees have to wonder whether their employer will actually offer a super salary sacrifice arrangement. Because it won't matter. If they don't, you'll be able to do it yourself.

One of the biggest problems for salary sacrifice in the past is that employers were under no obligation to offer it as an option to clients.

From July 1, they still will have no obligation to do so.

But employees will simply be able to implement it themselves.

This will be possible because the new rules allow individuals to make tax deductible contributions directly. The change in rules will also remove a more serious anomaly (I'll come back to that).

From July 1, anyone who is able to make concessional contributions to super will be able to make them directly to their super fund.

So let's say you're earning $80,000 from your employer. Your employer is then putting in 9.5 per cent, or $7600 a year, into your super fund.

With the new CC limits of $25,000 for everyone from next year, if you're able to contribute you'll be able to put in $17,400 into your super fund. And then be able to claim the deduction.

The contribution will be made via your super fund. And the difference between your marginal tax rate and the super contributions tax rate of 15 per cent will be refunded via your tax return.

(Note: One of the downsides of this for employees is that you will have to pay, up front, the contributions with after-tax money. Then claim the tax deduction, and then get the refund via your tax return. This might prove to be a cash-flow issue for some. And for them, maintaining salary sacrifice arrangements with willing employers might be worthwhile.)

Another advantage of this new rule is less guesswork to a constant frustration about whether an employer is going to make contributions on time.

Employers are not required to pay their super contributions until the 28th day of the following month/quarter. The problem here is that if you are trying to maximise your super contributions via voluntary contributions, you're at the whim of your employer as to whether the contributions will be made before June 30 (and therefore fall into the current financial year) or before July 28 (meaning they fall into the following financial year.

Contributions count according to the date they were received by the super fund.

It will give a little more certainty if you know that your SG contributions from your employer are going to be paid before or after June 30 (call your pay office to confirm. Then you will be able to maximise deductible contributions, or withhold them, in the lead-up to the last days before June 30.

Disregarding the 10% rule

Another advantage is that the 10 per cent rule will soon be gone. The 10 per cent rule means that if you receive 10 per cent or more of your income as a self-employed person, you're not able to make concessional contributions personally.

You can only make them as an employee, which can be very restrictive, often impossible, to make contributions up to your CC limit.

It's been a big problem for some, particularly those whose employment arrangements change during a financial year.

If you go from self-employed to employee during a financial year, or vice versa, it could play havoc with your contributions and tax deductibility.

Take one client of mine, for example. He was a partner in a law firm for the first half of the year and was considered 'self employed'. So he made regular contributions to his super fund that he usually claimed at the end of the financial year.

However, one year, he changed employment. And the new employment, though still as a partner, meant that he was partly an employee, receiving SG contributions.

This meant that the contributions that he had made – for which he intended to claim a tax deduction – in the first half of the year, could no longer be claimed. Those contributions had to be made as non-concessional contributions, which, given he was under 40 years of age, was not optimal.

However, from July 1, 2017, this anomaly will be removed. Under most circumstances, he would still be able to claim what he had contributed as a tax deduction, so long as he was still under the $25,000 CC limit for the next financial year.

Dodgy employer super contributions gone …

The biggest anomaly that will be lifted is actually pretty serious. The law has stated that an employer must ensure that the superannuation payments equal to the Superannuation Guarantee are made on behalf of an employer.

But, technically, an employee's request for salary sacrifice could actually reduce the employer's requirement to make SG contributions.

For example, take an employee earning $100,000 a year. The employer would be required to pay $9500 to super as SG contributions. However, if the employee requested to have $10,000 made as a salary sacrifice contribution to super, then that is in excess of the 9.5 per cent that an employer needs to ensure goes to the super fund. The employer would be left with no legal requirement to pay an extra 9.5 per cent in SG to the employee's super fund.

Few employers would actually have done that. But it has been something that the financial advice community has continually warned about – to check to see what your employer is actually contributing to super in these instances.

Employees where this is an issue would be better to cancel salary sacrifice arrangements (post July 1), force the employer to pay the 9.5 per cent, then make their own tax-deductible contributions during that same financial year.

Move in age of access to super?

New Zealand Prime Minister Bill English this week signalled that the age of access to superannuation was to be lifted from 65 to 67.

The decision was based around New Zealanders living longer and is almost certainly a precursor of what is to come here.

It has been talked about on the sidelines here for years. Australia has already raised the age pension access age from 65 to 67. From July 1 this year, eligibility for the age pension will increase from 65 years to 65 years and six months. And it will increase every two years, by six months, until it hits age 67 in 2023.

The only unusual part of the decision in NZ, as far as I'm concerned, is that they have announced it won't kick in for … 20 years!

Yes, access to NZ super will rise from 65 to 65.5 years in 2037. And will then rise by six months each year until it hits 67 years in July 2014. That means that it won't start to affect anyone born before June 1972. And those born after July 1974 will have to wait until they are 67 to fully access their super.

It will happen here in Australia. It's just a matter of when it's announced. Nothing is surer. But don't assume that it will come into place in 20 years. It will be sooner than that.

The information contained in this column should be treated as general advice only. It has not taken anyone's specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your advisor/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is a licensed financial advisor, a mortgage broker and an expert on self-managed super funds. He is a regular contributor to Eureka Report. To contact Bruce, please click here.