Salary Sacrifice Superannuation

Salary sacrificing can be a smart way to boost your superannuation. When you salary sacrifice to superannuation, you not only increase the amount of dollars you will have in retirement, but you can reduce the income tax you have to pay now. What’s more, salary sacrifice is hassle free because your employer makes the superannuation contributions for you.

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What is salary sacrificing to superannuation?

Salary sacrificing to superannuation is an arrangement with your employer to contribute some of your future pre-tax salaries into a variety of benefits. Additional superannuation payments can be one of these benefits. In essence, you let your employer put some of your pre-tax salaries into your superannuation account rather than receive it in your pay packet.

What are the tax advantages of salary sacrifice?

1. Lower your taxable income
By salary sacrificing part of your salary into superannuation you are effectively reducing your taxable income. This means that you pay less income tax. In fact, depending on how much you sacrifice into superannuation, you could even drop into a lower tax bracket. For example, someone who earns $85,000 p.a. and sacrifices $6,000 per year into superannuation, will drop from the 38% marginal tax rate to the 30% marginal tax rate, assuming no other income.

2. More money into your superannuation
The great feature of salary sacrifice is that the dollars you contribute to superannuation are pre-tax dollars rather than post-tax dollars, which means more money in your account and more money to earn compound interest to build a greater retirement income. Salary sacrifice contributions are taxed at 15% when they enter your account. This may be much lower than the marginal tax rates you pay, which can be as high as 46.5% (including the Medicare Levy). Generally, the higher your income, the more tax savings can be made by sacrificing your income into superannuation.

For example, if you were in the highest tax bracket of 46.5% (including the Medicare Levy) then $1,000 of your pay equates to:

  • $535 in your pocket, or
  • $850 in your super account

3. Less tax payable on investment earnings
When you invest your money outside of superannuation, your personal income tax rate of up to 46.5% (including the Medicare Levy) may apply on any investment earnings and net capital gains on the sale of investments. In contrast, any earnings in superannuation may be subject to lower rates of tax.

How much of your salary can you sacrifice?

There is no limit to the amount that you can sacrifice to superannuation under tax law. However, there are limits to the amount of taxable contributions that can be made which are taxed concessional. Excess amounts above these limits are subject to a penalty tax rate. Check with your financial adviser to ensure you do not exceed these limits. Further, your mandated award or workplace agreement may stipulate a minimum salary or wage that you must receive.

What money can be salary sacrificed?

Only future salary can be salary sacrificed, meaning you cannot sacrifice an amount that you are already entitled to for previous work completed, such as accrued leave payments.

How do you arrange salary sacrifice?

There are several steps to getting a salary sacrifice arrangement started:

  • Check with your employer to see if they offer salary sacrifice (not all employers do).
  • Decide how much you would like to sacrifice and ensure that this will be taken from your pre-tax salary, not your post-tax salary.
  • Check with your employer if your salary sacrifice amount will impact on any benefits you receive (e.g. leave loading) and whether your employer’s compulsory Superannuation Guarantee contributions will be reduced if your salary has been reduced because of your salary sacrifice request.
  • Fill in the appropriate form from your HR department or Payroll Officer so that they can start forwarding money from your salary directly to your superannuation fund.

December 2009

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Published: July 26, 2013
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