There are a number of reasons why the terms of an employment
agreement should be reviewed and updated from time to time. One
good reason why the terms of a senior employee's employment
agreement should be reviewed prior to 1 July 2012, is to ensure
that the concessional superannuation contributions which are made
by the employer on behalf of the employee, either under the terms
of the employment agreement or under a salary sacrifice
arrangement, do not cause the employee to become liable for penalty
Superannuation contributions can be divided into two types,
concessional (before-tax) and non-concessional (after tax).
Concessional contributions include all contributions made by the
employer including those which the employer is required to
contribute by way of the compulsory superannuation levy and all
contributions made under a salary sacrifice arrangement.
From 1 July 2012, the cap on concessional superannuation
contributions is $25,000 for all employees1.
What high income employees need to be aware of is that
contributions which are made by their employers on their behalf may
cause them to exceed the concessional superannuation contributions
cap without the employee necessarily realising that the cap has
been exceeded. For example, although employers are only required to
contribute the compulsory superannuation levy (currently 9%) on an
employee's base salary up to a maximum contribution base (as
from 1 July 2012 the maximum contribution base is $183,000 per
annum), some employment agreements provide that the employer is
required to pay superannuation contributions on the total amount of
the employee's base salary. If the employment agreement
contains such a provision, once the employee's base salary
earnings exceed $278,000, the concessional contribution cap will be
Where the employee uses the salary sacrifice provisions in an
employment agreement to have the employer make additional
superannuation contributions on his/her behalf, once the employer
contributes the 9% superannuation levy up to the maximum
contribution base of $183,000, this only allows for a further
$8,530 in superannuation contributions which can be made by way of
any salary sacrifice arrangement before the concessional
contribution cap is exceeded.
If the cap is exceeded, the employee's excess contributions
are likely to be subject to penalty tax payments at the rate of
Excess concessional contributions are counted in determining the
position of non-concessional contributions against the
non-concessional contributions cap.
If the non-concessional contributions cap is exceeded (for
example, through additional personal contributions or contributions
from an asset disposal above the CGT cap2) then the
excess concessional component incurs penalty tax at the rate of
The implications of the cap on concessional superannuation
contributions being only $25,000 for all employees as from 1 July
Employees and employers need to be aware what concessional
super contributions are made on behalf of the employee, to ensure
the concessional superannuation contribution cap is not
inadvertently exceeded; and
When it comes to drafting an employment agreement, the employer
and the employee should ensure that sufficient flexibility exists
to allow for changes to be made to ensure that if the law changes
so can the basis upon which the employee's remuneration is
1 The implementation date of the previously
announced over-50s concessional cap of $50,000 has been deferred
until 1 July 2014. 2 Resulting in a penalty tax of 46.5%.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Long experience representing many of Australia's leading employers has taught us that in employment litigation the identity of an employee's representative is a major factor in how employee litigation runs.
Australian employees receive certain entitlements (such as annual leave and superannuation) where contractors do not.
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