There is no legal requirement for an effective salary sacrifice agreement to be in writing and, therefore, it may be entered into verbally between parties.
Nonetheless, The Money Edge strongly recommends that all salary packaging agreements be entered into in writing because a detailed agreement provides clarity on the right and obligations of the parties and reduces the likelihood of disputes. Written agreements also make it more difficult for the ATO to argue that the arrangement is ineffective or invalid for tax purposes.
Ideally, a salary sacrifice agreement should document all possible employment, entitlement and payment issues. As a minimum, the agreement should contain clauses to address the following issues:
- Adjustments – Broadly, the agreement should allow for any variations to the components of an employee’s remuneration package at any time in the employment period.
- Annual and long service leave – The agreement should provide that annual leave and long service leave paid to continuing mployees is based on their remuneration package after reductions have been made for salary sacrificed amounts.
- GST input tax credits on acquisitions – When calculating the cost of a particular benefit to the employer, the agreement should have regard to the GST-inclusive value of the benefit (where applicable) and any GST input tax credit entitlement to the employer.
- GST payable on employee contributions – The agreement should increase the salary sacrifice amount for any GST payable by the employer on any after-tax contributions made by the employee.
- Non-deductible benefits – The agreement should allow for adjustments to an employee’s remuneration package for any non-deductible benefits provided (e.g., entertainment).
- Pay increases/reviews – The agreement should allow for any pay increases to be taken in the form of salary, wages and/or non-cash benefits.
- Performance bonuses – The agreement should provide scope to salary package any performance bonuses before an employee has a legal entitlement to receive them.
- Rise and fall clauses – The agreement should allow for adjustments in the salary and/or benefits component where, for example:
- the estimated FBT liability on a benefit was under or over stated;
- adjustments are required to be made for GST; or
- other changes in the employer’s costs of providing the benefit.
- Superannuation Guarantee (SG) contributions – The agreement should provide for employer SG contributions to be based on the employee’s total remuneration package (not just the salary portion). An employee wishing to salary package into superannuation should also have regard to their concessional contributions cap in order to avoid a liability for excess contributions tax.
- Termination entitlements – The agreement should provide that all termination entitlements (e.g., unused annual leave) be based on the employee’s total remuneration package and not only on the gross salary component.
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