Higher paid employee contributions information for payroll

What is the concessional contributions cap?

The Australian Government caps concessional (pre-tax) super contributions, with the current cap set at $30,000 for all individuals for the 2024/25 financial year.

Find out more in our Contribution caps information sheet or on the Australian Taxation Office (ATO) website.

Who is likely to exceed the concessional cap?

Local government employees on higher salaries with accumulation accounts are most likely to exceed the concessional contributions cap.

The higher employer contribution rates that apply to local government employees under the Local Government Act, combined with optional member contributions, further increases the likelihood of exceeding the cap.

You can work out if an employee is likely to exceed their cap by doing this calculation:

If the result of this calculation is less than your employee’s annual salary, it is likely they will exceed the concessional contributions cap. Any extra contributions the employee salary sacrifices, or claims a tax deduction for, will also count toward the cap.

What are my employees’ options?

The Local Government Act allows employees who will exceed the cap to limit concessional contributions to the amount of the cap and take any additional amount as salary by reducing their employee contribution. Employees of local government are able to reduce or cease their employee contribution from 1 July 2024.

Employers can form an agreement with their higher paid employees regarding the employer contribution rates that apply. This arrangement cannot be used to reduce an employee’s super contributions below the concessional contributions cap for the year – only to the cap.

The legislation prescribes that the ‘amount of the reduction must be paid by the employer to the employee as salary’. This means that the employee’s total employment cost (TEC) remains the same, with less being paid into super and correspondingly more paid as salary.

This legislation does not apply to members with a Defined Benefit account and these members are also unable to reduce their mandatory contribution.

Do the superannuation guarantee rules apply?

Employers must still meet the minimum quarterly superannuation guarantee (SG) contribution requirements. This is 11.5% of ordinary time earnings (2024/25), with the option to restrict contributions to the maximum contribution base, based on a salary of $65,070 per quarter (for 2024/25).

Also, remember that with less of the employee’s TEC being paid in super, their salary will increase. Your SG obligations are based on the increased salary.

Can we simply stop contributions once the cap is reached?

You will still need to meet SG contribution requirements each quarter, at a minimum. This means you can’t stop contributions completely for an entire quarter or longer period. If a contribution cap agreement is implemented during a financial year, this measure will help but may not stop the employee from exceeding the cap.

Over a full financial year, this measure should stop the employee from exceeding the cap (unless they make voluntary salary sacrificed superannuation contributions).

Would it help if employees made their contributions after tax?

If employees choose to make their member contributions from after-tax pay, these do not count towards their concessional cap. Instead, they count towards the annual non-concessional contributions cap, which is much higher and capped at $120,000 for the current financial year. The tax implications of this decision depend on the individual’s personal circumstances. An additional consideration is the potential impact on the employee’s take-home pay.

Employers cannot advise employees on the potential tax implications of applying the relief. Brighter Super offers single issue financial advice on contributions at no additional cost to members and our representatives are available to talk to your employees.

How do I work out what the contribution rates will be?

The simplest way to work out how much to contribute on behalf of an individual is to calculate the dollar amount of contributions for each pay period. Based on 26 fortnightly pay periods, the calculation will be:

If salary and super contributions are paid fortnightly:

Alternatively, if your payroll system requires a percentage figure you can use the calculation below for one year:

Example based on a salary of $170,000:

Continuing with the example, you could make 12% as an employer contribution and 5.6% as salary sacrificed standard member contributions. If this approach will not work for you, contact us to discuss other possible solutions.

Local government employees are now able to reduce their employee contribution at any time. You should encourage your employee to obtain tax advice if they are unsure of the implications of this choice.

What if the employee wants to reduce contributions part way through the year?

The calculation for a part year, where the employer has already made concessional contributions in the year to date, is more complex.

Considerations for part years:

• Employees can reduce their contributions to the concessional contributions cap but no lower.
• Take into account contributions already made during the current financial year.
• Ensure the minimum SG amount is contributed in each remaining quarter.
• If the calculated amount for the remainder of the year does not meet the minimum SG contribution, you will need to make the minimum SG contribution for that employee, even if it means they will exceed the cap.
• Ensure you calculate your quarterly SG obligation based on the employee’s increased salary (which results from less dollars being paid into super).
• Ensure that the employee’s TEC does not reduce as a result (as required by the legislation).

What if employees are making other voluntary contributions to super?

You cannot take into account any voluntary contributions your higher paid employees are making when reducing contributions to the cap. The only contributions that can be reduced under this relief are the compulsory contributions mandated under the Local Government Act.

Any other salary sacrificed super contributions, personal contributions for which a tax deduction has been claimed, or contributions from other employers, also count towards the concessional cap but cannot be addressed by this relief.

What do I need to do?

If an employee is likely to exceed the concessional contributions cap due to employer and standard/compulsory contribution rates, you should discuss the options to reduce their contributions.

If you reach an agreement, you should ensure it only benefits the employee to the extent that they reach the concessional cap.

It could be part of an employment contract, a form or a letter, as long as it is signed by both parties and provides the following information:

• Employee’s name
• Employee’s superannuation fund
• Date the agreement comes into effect and ends
• Dollar amount of the contributions to apply
• Period the contributions will apply to

See further down for some suggested wording. Please note that this is a guide only and it is important to confirm the wording of the written agreement with your taxation and legal advisers.

The agreement will need to be revised if the concessional cap changes (i.e. effective 1 July 2024 the concessional cap increased to $30,000).

What if our systems can’t do this?

We understand that payroll systems may not be able to automate this solution. We encourage you to determine ways you may be able to offer this to employees who request that their contributions be reduced to the cap.

You may consider manually calculating superannuation contributions for the small number of employees who wish to participate.

Suggested wording for written agreement

Amend or redraft as you need - this is a suggestion only and it is important that you confirm the wording of the written agreement with your taxation and legal advisers.