The virtue of (salary) sacrifice

Salary sacrificing into your super is no different—you’re giving up ready access to your money in your take-home pay. But in return you’re boosting your retirement savings and saving on tax.

You can pay extra cash into your super from your pre-tax salary at the concessional 15% rate of tax¹ —up to a limit (or cap) of $30,000 for 2014/15 (or $35,000 if you’re 49 or over). That’s a considerable tax saving for most people on their usual marginal tax rate.

Get your regular payment in place

With a new financial year fast approaching it’s a great time to get your salary sacrifice arrangement in place – on top of the regular super guarantee payments made by your employer. This way you’ll be able to maximise your concessional contributions and minimise your tax burden over the course of the next financial year.

Boost super, save on tax

Let’s look at how salary sacrifice could work in practice.

Judith, aged 50, is a teacher earning $80,000 a year. She currently puts $385 per fortnight into her online savings account (approximately $10,010 a year) and wants to start building up her retirement savings. She is considering whether to make:

• an after-tax contribution into superannuation of $10,010 a year, or

• an equivalent pre-tax (salary sacrifice) contribution.

After-tax contributions v salary sacrifice for Judith (2015/16)
 

Judith’s income tax position:	After-tax contributions	Salary sacrifice contributions
Gross salary	$80,000	$80,000
Less salary sacrifice contributions	Nil	($15,282)
Reduced gross salary	$80,000	$64,718
Income tax, Medicare levy	($19,147)	($13,875)
Net salary	$60,853	$50,843
After-Tax contributions to super	($10,010)	Nil
Take-home pay after contributions	$50,843	$50,843
Net income tax saving		$5,272
Judith’s super contributions position:
Super Guarantee contributions (9.5%)	$7,600	$7,600
Salary sacrifice (pre-tax) contributions	Nil	$15,282
15% contributions tax	($1,140)	($3,432)
Total net concessional contributions	$6,460	$19,450
Plus non-concessional contributions to super	$10,010	Nil
Total net contributions for year	$16,470	$19,450
Additional net contributions into super		$2,980

In both scenarios, Judith’s take-home pay is the same. But by salary sacrificing into super, Judith can increase her super contributions for the year by $2,980, even after taking the 15% contributions tax into account.

Salary sacrifice checklist

Salary sacrifice isn’t without pitfalls. You’ll need to make sure you don’t unintentionally go over your contributions cap or reduce your other entitlements.

Here’s a handy checklist to make sure that you’ve ticked all the boxes.

1. Make sure that you can salary sacrifice

• Does your employer allow salary sacrifice?

• Are you under age 75?

2. Complete your employer’s standard salary sacrifice paperwork

You can’t salary sacrifice income already earned.

• Plan ahead to sacrifice bonus and leave payments.

3. Make sure your other entitlements aren’t affected

Check with your employer:

• how your super guarantee is calculated

• the definition of ‘salary’ used to work out your payments.

4. Monitor your concessional contributions cap

Check all concessional contributions for the financial year. These include: 

• compulsory contributions paid by your employer – such as the super guarantee 

• contributions from a previous role within that financial year 

• pre-tax contributions on top of your super guarantee

• administration fees and insurance premiums paid by your employer 

• contributions allowed as an income tax deduction – such as contributions you make if you are self-employed 

• notional taxed contributions if you are a member of a defined benefit fund

5. Get the agreement in writing

• Every employer is different. Make sure you know when your contributions are paid within the financial year so you don’t go over your concessional contributions cap.

6. Set up a notification

• Download the AMP app and set up an alert to notify you when your payments reach your account.

So don’t delay. Make sure you get your salary sacrifice arrangement in place by 1 July to take full advantage of the government’s tax concessions for the next financial year. You’ll soon see the difference when you next look at your super balance.

Please call us on (08) 9315 4788 to help you plan your salary sacrifice strategy and keep track of your contributions cap.