Salary Sacrifice on Termination

Q/  We have an employee who is terminating soon and he wants us to pay all of his termination pay directly to super.  I don’t think this is possible, but I’m not sure why. Can you assist please?

A/ Clause 21 of the ATO’s Salary Sacrifice Ruling (see link below) allows that an employee can salary sacrifice future salary and wages.  The term ‘salary sacrifice’ means the employee is agreeing to forego salary and wages for some other employer benefit, for instance superannuation or novated lease.  The issues are ‘what are salary and wages’ and what does ‘future’ mean?

Sacrificing unused leave on termination:

An employee who had the foresight to put a salary sacrifice arrangement for unused leave on termination in place years ago would likely be able to sacrifice that portion of the termination pay, because leave is deemed to be ‘salary and wages’, but they could only sacrifice the leave which accrued after they put the arrangement in place.  Not many employees think to do this, even if they are aware of the regulations.  The Salary Sacrifice Ruling clauses about when leave has been ‘earned’ are 89 and 90.

Sacrificing redundancy and/or ETPs:

The following is an extract from the ATO website:

In general, the rules affecting taxation of ETPs are

  • a payment must generally be received within 12 months of your termination to qualify for concessional tax treatment
  • ETPs can’t be rolled over into super.

Redundancy pay and ETPs are not deemed ‘salary and wages’ for the purpose of salary sacrifice.  The fact that they NOT mentioned in the Salary Sacrifice Ruling is sufficient to say they cannot be sacrificed.  (The ATO website wording also assists re ETPs.)

Sacrificing bonus/commission/incentive

An employee would need to have had the sacrifice arrangement in place prior to doing the work that was required to earn the bonus.  Where the employee has already done the work, regardless the bonus has not yet been calculated, it is too late to put a salary sacrifice arrangement in place.  Refer clause 23 of the Ruling.

Here is the link to the ATO ruling on Salary Sacrifice:

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