SMSF members using a salary sacrifice arrangement cannot automatically use the increased concessional contribution amount and will have to revisit those arrangements to guarantee any contributions meet the new limit, an SMSF legal expert has advised.
DBA Lawyers principal Dan Butler said while the rise in the cap on concessional contributions as a result of indexation, from $25,000 to $27,500 was automatic, this would not be reflected in any current salary sacrifice arrangements.
“If an employee has an arrangement with an employer who is making contributions on their behalf – that is forgone salary – and that should take place in accordance with Tax Ruling TR 2001/10,” Butler said during a recent webinar.
“That ruling requires an effective salary sacrifice agreement to be prospective. What is needed is an agreement in advance of the point of derivation.”
He gave an example of an employee receiving a bonus and electing to have that contributed toward superannuation, which could not take place unless an effective salary sacrifice agreement was already in place to overcome the deemed derivation that occurs under the Income Tax Assessment Act.
This would also apply to any increases in concessional contributions and where a salary sacrifice arrangement was used to make those contributions, he said.
“What I am suggesting here is because of the increase of in the concessional contribution cap it is now worthwhile discussing these arrangements with relevant clients who have a salary sacrifice agreement in place,” he noted.
“There could be a real need to review any salary sacrifice agreements and if they are still effective and if they still want them in place.”
He also noted that under changes introduced at the start of last year, any salary sacrifice arrangements still in place were required to add back any salary sacrifice contributions to ordinary time earnings and then calculate the required superannuation guarantee (SG) rate to prevent employees creating an SG offset for their employer.
“So, those contributions are added back to an employer’s earnings and then the 9.5 per cent SG rate for this financial year is applied, and bear in mind, from 1 July 2021 it will move to 10 per cent, so practitioners should ensure their employer clients have that new figure in place from 1 July,” he said.