A superannuation guarantee loophole that allowed employers to use salary sacrificed contributions to make up part of their required super guarantee contributions has been closed. From 1 January 2020, employers must make the full amount of mandatory super guarantee contributions and cannot use salary-sacrificed amounts to reduce those mandatory contributions. Depending on the types of employment agreements between employees and employers, this could mean more money for employees’ retirement.

The concept of super guarantee – the requirement for employers to contribute 9.5% of an employee’s salary or wages into a nominated super account – should be familiar to everyone, particularly anyone who is an employee, as it makes up the bulk of future retirement income. Employees may also be salary-sacrificing amounts of their salary and wages to put extra into their super.

Before this year, a loophole in the law meant that an employee’s salary-sacrificed amounts could be counted towards employer contribution amounts. This allowed a potential reduction in employers’ mandated super guarantee contributions – essentially working against the employee’s intention to add extra to their super. In addition, employers were able to calculate their super guarantee obligations on the lower, post-sacrifice earnings base.

Depending on the type of employment agreement between an employee and employer, this meant that if the employee salary-sacrificed an amount equal to or more than the super guarantee amount the employer was required to pay, the employer could have chosen to not contribute any non-sacrifice amount and the legal requirements of the super guarantee would still be met. It’s important to note that this was not the original intention of the law, and not all employers would make the choice to exploit this loophole; however, where they did, employees who salary-sacrificed could be short-changed and end up with lower super contributions as well as a lower salary overall.

The law has now been changed specifically to close this loophole. From 1 January 2020, amounts that an employee salary-sacrifices to superannuation cannot be used to reduce the employer’s super guarantee charge, and do not form part of any late contributions the employer makes that are eligible for offset against the super guarantee charge. To avoid any possible shortfall in their mandatory super guarantee contribution payments, employers must now contribute at least 9.5% of an employee’s ordinary time earnings (OTE) base to a complying super fund. The OTE base consists of the employee’s OTE and any amounts they sacrifice into superannuation that would have been OTE if the salary-sacrifice arrangement wasn’t in place.

The following simple example illustrates the effect of the old law versus the new law for an employee with an OTE base of $15,000.

Old law New law
Employee’s OTE $15,000 $15,000
Super guarantee entitlement ($15,000 × 9.5%) $1,425 $1,425
Salary-sacrifice contribution $1,000 $1,000
Minimum compliant employer contribution $425 $1,425
Total super contributions
(including salary-sacrificed amount)
$1,425 $2,425

Source: Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Act 2019.