Local government councillors and salary sacrifice arrangements

Can a local government council which does not have a unanimous resolution in effect, in accordance with section 446-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA), enter into an effective salary sacrifice arrangement (SSA) with its councillors such that contributions to a complying superannuation fund made under the arrangement in lieu of remuneration for the individual are employer contributions for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

No. A local government council which does not have a unanimous resolution in effect, in accordance with section 446-5 of Schedule 1 to the TAA, cannot enter into an effective SSA with its councillors. Any contributions to a complying superannuation fund made under the arrangement in lieu of remuneration for the individual are not employer contributions for the purposes of the SGAA but are considered to be a redirection of income that is otherwise assessable to the individual councillors.

The local government council is seeking to enter into an arrangement with its councillors under which the remuneration the councillors would otherwise expect to receive is paid into a complying superannuation fund.

The local government council does not have a unanimous resolution in effect, in accordance with section 446-5 of Schedule 1 to the TAA, that the remuneration of members of the council be subject to PAYG withholding.

A SSA is an arrangement under which an employee agrees to forego part of the total remuneration that he or she would otherwise expect to receive as salary or wages, in return for their employer or someone associated with their employer providing benefits of a similar value. A SSA is considered to be 'effective' if the employee agrees to receive part of his or her total remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages.

In order to enter into an effective SSA, either the PAYG withholding provisions in sections 12-35, 12-40 or 12-45 of Schedule 1 to the TAA must apply or there must be an employer/employee relationship between the local government council and its councillors within the meaning of section 12 of the SGAA.

As the local government council does not have a unanimous resolution in effect that the remuneration of the members of the council be subject to PAYG withholding, the PAYG withholding provisions do not apply.

For an employer/employee relationship to exist between the local government council and its councillors for the purposes of the SGAA, the definitions of 'employer' and 'employee' in section 12 of that Act must be satisfied. Under subsection 12(1) of the SGAA the terms have their ordinary or common law meaning. Subsections 12(2) to 12(11) of the SGAA expand the ordinary meaning of the terms and make particular provision to avoid doubt as to the status of certain persons.

None of the traditional indicia of a common law employment relationship are applicable to the relationship between local government councillors and the council. Therefore local government councillors are not employees at common law.

Subsection 12(9A) of the SGAA provides that a member of a local government council is not an employee of the council unless subsection 12(10) of the SGAA applies. Subsection 12(10) of the SGAA states that a person covered by paragraph 12-45(1)(e) of Schedule 1 to the TAA is an employee of the relevant body.

A person will be covered by paragraph 12-45(1)(e) of Schedule 1 to the TAA if the local governing body has a unanimous resolution in effect, in accordance with section 446-5 of Schedule 1 to the TAA, that the remuneration of members of the body be subject to PAYG withholding.

The relevant council does not have a unanimous resolution in effect that it be subject to PAYG withholding, therefore paragraph 12-45(1)(e) of Schedule 1 to the TAA does not apply. Accordingly, subsection 12(10) of the SGAA also does not apply and by virtue of subsection 12(9A) of the SGAA, the councillors will not be employees for the purposes of the SGAA.

As there is no employer/employee relationship within the meaning of the SGAA in existence between the local government council and its councillors, any part of the remuneration paid to the fund under the arrangement cannot constitute employer contributions for the purposes of the SGAA. Rather it is a redirection of income that is otherwise assessable to the councillor.

Therefore the local government council cannot enter into an effective SSA with its councillors.