Law to reduce salary sacrifice announced

The government will introduce legislation to minimise the use of excessive salary sacrifice as a means of paying less tax.

Thursday, April 20th 2006, 6:48AM

"In many cases, high-income employees 'sacrifice' their salary merely to reduce their income tax. They do this by arranging a dramatic reduction in their salary in return for a proportionate increase in employer superannuation contributions, which are taxed at a rate lower than their salary," Finance Minister Michael Cullen and Revenue Minister Peter Dunne said in a joint press release.

"That is a misuse of the tax rules on employer superannuation contributions that results in great unfairness to other taxpayers on similar incomes. In the extreme, those who take advantage of salary sacrifice may well pay thousands of dollars less in tax than others on the same income.

"If the practice is not stopped, it has the potential to create a revenue loss of between $90 million and $120 million a year.

In the changes announced yesterday most employees are taxed at about the right marginal rate on their employer superannuation contributions. The top rate of tax on employer superannuation contributions will remain at 33%, but employees on lower salaries will pay only 15 or 21%, depending on their overall income.

"Rates will be based on the total of an employee's salary or wages and employer superannuation contributions, and the accompanying thresholds for tax on employer contributions will be adjusted. The adjustments will result in the thresholds being 15 per cent higher than personal income tax thresholds to reduce the possibility of over-taxation.

"The complexity of the legislation will be reduced by removing two of the options for assessing tax on employer superannuation contributions that are not being used.

The changes will be included in the taxation bill scheduled for introduction in May.

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