Opinion: Superannuation Reform Doesn’t Go Far Enough

The ‘Better Super’ reforms introduced by the Federal Government have certainly bolstered the position of superannuation as the long-term savings vehicle of choice for Australians.

Indeed, one of the biggest changes to superannuation has been to withdrawals from taxed super funds (such as legalsuper), which are now tax-free after age 60 (whether paid as a pension or lump sum). With contributions to superannuation taxed at a maximum of 15 per cent, it is difficult to beat super as a tax-effective savings vehicle over the long term.

For employees, one of the most tax-effective ways to take advantage of the new rules is to invest into superannuation through salary sacrifice.

Salary sacrifice is giving up part of your pay packet and directing the selected amount into your super fund. Salary sacrifice contributions are taxed at 15 per cent; for many employees this rate of tax is far below that applied when wages are paid directly into their pocket. The following table explains this further. 

Employees on higher incomes, like many lawyers, are often in a better position to take advantage of salary sacrificing than others. They can afford to sacrifice a portion of their income, taking advantage of the low tax rate, without greatly affecting their lifestyle.

However, salary sacrifice remains largely untouched by recent reforms. Unlike other areas of superannuation that tend to be governed by numerous and complex regulations, salary sacrifice is covered by little regulation. Traditionally, salary sacrifice has tended to be covered in awards and industrial agreements. This vacuum has put much of the control over salary sacrifice arrangements into the hands of employers.

One of the most fundamental areas not covered by legislation is when employers should provide salary sacrifice. Employers are not obligated to make salary sacrifice available to their employees, and many Australians are unable to take better advantage of the super reforms. According to Mercer Human Resources Consulting, about 50 per cent of wage earners and 20 per cent of salaried workers are currently blocked by their employers from salary sacrificing.

When salary sacrifice is offered a lack of legislation governing the way it is applied has created an uneven and sometimes unfair playing field.

While salary sacrifice is supposed to be about employees deciding what to do with their income, employers currently make the key decisions about any income their employees elect to salary sacrifice.

For instance, employers have flexibility over when they pay salary sacrificed income into an employee’s super fund. Over the long term this delay can have a significant effect on the value of employees’ super fund balances.

Employers are also able to decide whether to calculate their Superannuation Guarantee (SG) obligation based on employees’ pre- or post-salary sacrifice earnings. For instance if an employee earning $80,000 decides to sacrifice an additional $5,000 into their superannuation, the employer is by law allowed to calculate their 9% SG contribution based on the reduced $75,000 salary and not the employee’s gross salary of $80,000.

Employers also elect whether to use salary sacrifice contributions to reduce their obligation to pay the 9% SG. An extreme example would be the case of an employee who salary sacrifices 9% of their income and their employer using this contribution to meet their employer obligation, thereby giving the employer a financial advantage.

Finally, employers are not obliged to disclose their salary sacrifice contribution policies to their employees, meaning these rules may be applied without employees’ knowledge.

Ultimately, salary sacrifice is about giving employees an effective way to boost their retirement savings. The majority of Australians would see it as inherently unfair that an employer can make decisions that have consequences on their decision to save, especially if those decisions were to be made without full and upfront disclosure.

We need a level playing field with employers and members on an equal footing. There also needs to be increased certainty about when and how salary sacrifice operates and there needs to be transparency throughout the process.

It’s not good enough for the Federal Government to trumpet the success of their superannuation reforms when more work is needed.

Andrew Proebstl

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legalsuper is Australia’s largest industry super fund dedicated to the legal sector, managing close to $1billion. No-commissions apply, and all profits are returned to members. If you would like to obtain a copy of a Guide to Salary Sacrifice please contact David Eastwood at deastwood@legalsuper.com.au