Super offers considerable tax advantages as a form of saving if your marginal tax rate is above the superannuation contributions tax rate of 15 per cent.
If you are earning more income than you need at present, or are in a high marginal tax bracket, you can obtain a tax advantage by sacrificing a portion of your salary into super. It means you forgo pay in your hand now for a higher retirement benefit later.
So instead of paying your marginal tax rate, you can sacrifice pay now and pay tax at the rate of only 15 per cent on that sacrificed amount. Your employer pays the sacrificed portion of your pay into your chosen fund and your take-home pay drops accordingly.
However, you should remember that super locks your money up until you are at least 55 years of age. Sacrificed pay is similarly locked up. You can only get access to your employer-funded super money before you reach preservation age in exceptional and very restricted circumstances.
How salary sacrifice works
Some people can arrange for their employer to make additional pre-tax contributions to their superannuation on their behalf. It is a tax-effective strategy for those who earn more than $37,000 a year, as you can boost your retirement savings and pay less tax overall. This is because certain contributions to superannuation are taxed at a lower rate than your take home pay.
Bill is 35 and earns $75,000 a year. He has living expenses of $52,000 a year, including his rent, childcare fees, food, bills, entertainment, etc. If he wasn’t to enter a salary sacrifice arrangement, Bill’s employer would pay superannuation guarantee to Bill’s super fund (which would be taxed at 15 per cent), while Bill would take home the rest of his pay which would be taxed at his marginal rate (32.5 per cent).
Without salary sacrifice, Bill will pay $17,047 tax on his income of $75,000 and his super fund will pay $1,041 tax on his superannuation guarantee contributions of $6,938.
Bill decides he wants to enter into a salary sacrifice arrangement. He approaches his employer who agrees to contribute 10 per cent of Bill’s (pre-tax) salary to his super fund. This arrangement means that Bill will pay $14,497 tax on his income and his super fund will pay $2,166 tax on his total superannuation contributions (salary sacrifice and superannuation guarantee).
| || Without Salary Sacrifice ||With Salary Sacrifice |
|Salary ||$75,000 || $75,000 |
|Salary Sacrifice to Superannuation || $0 || $7,500 |
|Less tax ||$15,922 || $13,485 |
|Less Medicare levy ||$1,125 || $1,013 |
|Net Pay (take-home pay) ||$57,953 || $53,003 |
|Less Living Expenses ||$52,000 || $52,000 |
|Leftover Pay ||$5,953 || $1,003 |
|Superannuation Guarantee ||$6,938 || $6,938 |
| || || |
| Total Tax paid by Bill ||$17,047 ||$14,497 |
| Total Tax paid by Bill's super fund || $1,041 || $2,166 |
| Tax advantage with salary sacrifice || $0 ||$1,425 |
| Net contributions to Bill's super || $5,897 ||$12,272 |
This is based on 2013/14 tax rates (including the Medicare Levy), 2013/14 SG rates, and assumes Bill does not have a HECS/HELP debt. Amounts have been rounded to the nearest $1.00.
Bill’s salary sacrifice arrangement means that his weekly take-home pay will be slightly lower, but his contributions to superannuation will increase significantly (from $6,938 to $14,438), and he will pay a lower amount of tax overall ($16,663 from $18,088) as he trades off a higher rate of taxation on his take home pay for a lower rate on his salary sacrificed superannuation contributions.
Your employer may drop its SG contributions to your super fund based on the new lower salary. Therefore, you should enter into a written agreement with your employer specifiying your ordinary salary before proceeding. Should you have doubts, seek specific advice.
Thereare limits to the amount of concessional tax treatment that you can receive ina year. These limits depend on your age. For further information, refer toinformation on the Contributions Caps at the ATO’s website: http://www.ato.gov.au/.