If you are earning more than you need to live comfortably, salary sacrificing may be an attractive option to reduce your tax, boost your superannuation and prepare for a more comfortable retirement later on.
Salary sacrificing simply involves having part of your salary paid into a superannuation fund by your employer rather than receiving it as income. These contributions are not included as part of your assessable income, reducing your income tax burden.
However, you can’t have it all your own way.
Salary sacrificing is such an attractive strategy but beware of exceeding the concessional contributions cap which will negate any tax benefits. Staying under your applicable limit will mean salary sacrificed contributions attract only a 15% contributions tax. This is significantly less than you would pay in income tax if you received it as income.
CASE STUDY
Karen is promoted to a more senior role and her annual salary increases from $70,000 to $80,000 per annum. Her employer offers her the option of having the additional remuneration paid direct into her superannuation (salary sacrifice) or receiving it as income, which she could then contribute into superannuation if she wishes.
The following table compares the different outcomes of the two strategies including the first year’s earnings on the contribution.
| Without Salary Sacrifice | With Salary Sacrifice | |
| Additional remuneration | $10,000 | $10,000 |
| Less: salary sacrifice | – | $10,000 |
| Additional assessable income | $10,000 | – |
| Less: Income tax (32.5%) | $3,250 | – |
| Less: Medicare levy | $200 | – |
| Additional income after tax | $6,550 | – |
| Personal contribution into superannuation | $6,550 | – |
| Less: Superannuation contributions tax (15%) | – | $1,500 |
| Net contribution into superannuation | $6,550 | $8,500 |
| Earnings on additional superannuation (7%) | $230 | $298 |
| Less: tax on superannuation earnings (15%) | $35 | $45 |
| Superannuation earnings after tax | $195 | $253 |
| Benefits: | ||
| Additional income (inc. superannuation earnings) | $10,230 | $10,298 |
| Total tax | $3,485 | $1,545 |
| Total boost to superannuation | $6,745 | $8,753 |
There is an obvious win-win for Karen by sacrificing the additional remuneration to super – she pays less tax and increases her superannuation balance by a larger amount.
You will also need to have a formal agreement in place with your employer. And importantly, you won’t be able to access the money until you retire. Depending on your year of birth you may have to wait until you turn 60 before you can access these funds.
If you want to take advantage of saving tax through salary sacrificing to super, firstly speak to your employer and then talk to us to help you set up an effective arrangement to maximise your benefits in both the short and long term.
