Salary Sacrifice and Superannuation: A Guide for Workers and Employers
Salary sacrifice is where you get your boss to put a bit of your before-tax pay into super. Because you receive less tax pay, you receive less tax. And because that amount is paid straight to your fund, you haven't had to pay income tax on it first. So there's more of your money going in.
As a result, your super savings grow faster. This works is you're paying tax at a higher marginal rate than the rate with your super contributions is taxed in the fund. It's really straight-forward and lots of people does it.
In this section, we are going to discuss in more detail how you can boost your super by salary sacrificing as a worker and employee.
So keep reading…
The Purpose of Salary-Sacrifice
By paying concessional (before-tax) super contributions, salary sacrificing super is a common strategy for workers with middle to high incomes. The arrangement is that your superannuation balance should increase while the income tax of your salary reduces.
By salary sacrificing your super, you can increase your super balance (and contribute 15% tax; for individuals earning more than $250,000, you can contribute 30% superannuation tax) while reducing the income tax payable (as much as 47%) on your salary.
Why Salary-Sacrifice? 3 Reasons to Consider Salary Sacrifice
An individual who earns $90,000 per year and has $120,000 savings in super will be able to improve on their super balance at 65 by an enormous $42,000 - all for an investment of around $31 a week in return pay.
1. Boost Your Super
Salary sacrifice is a very easy way to conserving extra super money, potentially leaving you thousands of dollars more in time. And you'll be surprised at how easy it is to do. You simply ask your company to pay some of your pre-tax salaries as super, rather than as a typical payment. That money goes into your super account, along with the regular super guarantee payments your employer has (currently 9.5 % of your salary).
A small addition will make a big difference down the road. According to ASIC's MoneySmart Superannuation Calculator, a 50 year old earning $90,000 a year with $120,000 in super can increase their super-equilibrium at 65 by a massive $42,000, just by salary sacrificing an additional 3% of income annually, all for an investment of around $52 a week before tax, or concerning $31 less in contributions.
2. Save on tax.
That brings us to the 2nd big benefit of salary sacrifice: tax cost savings. Because salary sacrifice contributions originate from your pre-tax revenues, they minimize your assessable income for tax obligation purposes, helping you pay less income tax annually.
And provided you stay under your concessional contributions cap (presently $35,000 a year for those over 49 on 30 June 2014, and also $30,000 a year for everyone else) your income sacrifice payments are set to only 15 %. As long as your marginal tax rate is over 15 %, that upper tax price might allow you to develop larger savings than an after-tax investment, for the same payment in advance.
For instance, if your tax obligation rate is 39 % (consisting of the 2 % Medicare), you could save 24 % in tax on the quantity you put into super through salary sacrifice, helping you increase your savings much faster.
3. Retire comfortably.
The issue here, for many of us, is that super employer payments alone are unlikely to be enough to provide us with a comfortable way of life in retirement. Your pension money may not be enough, given the length of time you will be spending throughout retirement.
Based on the Association of Superannuation Funds of Australia, a single person will need around $430,000 in the present dollars for a comfortable retirement while a couple will need $510,000. The unfortunate reality is that, unless they act, many Australians will certainly lose - especially now the government ceased increasing in the super guarantee price till 2021.
By paying a little additional amount into your super through salary sacrifice, you could have enough money for a comfortable and secure future while just making a little difference in your take-home pay. It's a safe and effective strategy.
Cons of Salary-Sacrifice
When it comes to cons, we have to look at its effects on the administration. What impact will it have on payroll? Salary sacrifice is an area where the government will continue to look at and it's important that an organization adheres to the rules that the government have put into when it comes to a tax perspective and get good advice to make sure that what they do is in line with those regulations.
From an employee's perspective, the additional amount can be a burden to middle earners, especially if they have other financial obligations. Thus, the employee has to consider is income before deciding on salary sacrifice.
How Salary Sacrifice Works
1. How Salary Sacrificing Works?
With a super sacrifice agreement, your employer can pay extra super contributions once you arrange for a portion of your before-tax salary to be paid in your fund. For tax purposes, your salary is then reduced while the extra contributions are considered employer contributions.
For employer contributions, there is no need to pay income on such amounts but a 15% “contributions” tax is subtracted from your contribution, and if your adjustable taxable income goes beyond $250,000, you pay an extra 15%. Your employer gets tax deduction for the superannuation contribution; since the employer would've gotten a minus when they pay you cash.
2. Salary sacrifice contributions are before-tax or concessional contributions
Superannuation contributions paid with a salary sacrifice agreement are considered before-tax or concessional contributions and have to be considered toward your concessional or after-tax contributions cap.
Super alert! Since July 1, 2017, the yearly concessional contributions cap plummeted to $25,000 for everyone.
Special rules and consideration apply to Australians over 65 years old and voluntary contributions aren't allowed for those over 75 years old.
Note: Before July 1, 2017, the concessional contributions cap that can be applied to you depended on how old you are. For the 2016-2017 year, for Australians aged 48 years below, the concessional cap was $30,000 on June 30, 2016; and for those over 49 years old; the concessional cap was $35,000 June 30, 2016.
3. Special cases for high-wage earners and low-wage earners
There's good news and there's bad news:
Should you earn $37,000 below annually, then you may get a refund on your contributions tax. For more details on the Lower Income Super Tax Offset (or the Lower Income Super Contribution), see article - A Practical Guide to SMSFs
Since July 1, 2017, if your adjustable taxable income is more than $250,000, the tax over your concessional (before-tax) contributions – such as Superannuation Guarantee and salary sacrifice contributions – is 15% including an extra 15% tax, adding up your concessional contributions tax to 30%. The $250,000 threshold was extended from the $250,000 pre-July 2017 income threshold, meaning more Australians are now contributing higher tax on concessional superannuation contributions.
4. Your boss may not approve the salary sacrifice
A salary sacrifice agreement is an arrangement between a worker and his or her employer. Employers don't need to agree on initiating this arrangement for the worker. If your boss doesn't sanction this, then you won't be able to do salary sacrificing with your super contributions.
Even if your employer does not consent you to salary sacrifice, your boss is still compelled to pay Superannuation Guarantee contributions for you.
Note: Since July 1, 2017, workers in such situation may have other options. Australians under 75 years old can claim a tax deduction for personal superannuation contributions that are applicable to the before tax or concessional contributions cap, and considering the previously-paid contributions for the fiscal year.
This alternative helps Australians who are working under employers who do not consent to salary sacrifice.
5. Have your agreement set in writing; it must be signed before the contributions start
Salary sacrifice agreements are a contractual deal between the worker and the employer. To protect you as an employee, a documented salary sacrifice arrangement guarantees that you can verify the terms and conditions of such agreement if there's any confusion. In fact, you can also add in the contribution payment's timing in the agreement. Will the contribution be made also as you get your weekly, biweekly, or monthly pay, or is your employer planning to make the superannuation contributions less often than your usual payment?
For instance, some employers make compulsory Superannuation Guarantee contributions every quarter, and he or she may choose to delay the direction of the voluntary superannuation contributions until such time the business makes SG contributions, so always follow-up on the super contribution's timing.
Note: Historically speaking, if you were bound by a workplace agreement or industrial award, then you could not reduce your income below the minimum wage established in an agreement or award. As stated by a Fair Work Australia court case (2010), it is now legal – through salary sacrifice – to reduce your income below the minimum wage established under an agreement or award.
It is therefore advised that employers ought to guarantee that any salary sacrifice agreements are sanctioned in writing by the relevant worker and openly assessed as beneficial and agreed upon by the worker. In these cases, where a worker plans to salary sacrifice below his or her minimum wage, particularly if he or she is thinking about a total salary sacrifice, it'd likely be sensible for both parties to get advice or counsel on the matter.
6. Is a pretend salary sacrifice arrangement prepared?
For the present financial years (2017-2018) – the law compels employers to contribute at least 9.5% of the regular time earnings of the worker into a superannuation fund as dictated by the SG Laws. An employee's regular time earnings or OTE – for the purposes of Superannuation Guarantee – is generally ordinary work hours but it can also include shift loading and commissions, and over-award payments, but not overtime.
Remember that the 9.5% amount of your salary can mean different Superannuation Guarantee amounts depending on the way you deal with the salary package. And depending on your award or contract, if you are earning, for instance, $80,000 annually, this amount may cover your Superannuation Guarantee entitlement, and you may get 9.5% SG other than your $80,000 salary. And if this $80,000 covers your Superannuation Guarantee entitlement, then your SG entitlement is $6,941, and your salary is $73,059. Also, if your Superannuation Guarantee entitlement is an additional amount to the $80,000 salary, then your fund gets $7,600 in contributions, and you have a total package of $87,600.
The word “including” can make a big difference in your finances. For more details, see “Helpful Resources
” by Australian Super Finder for more information.
Note: For the 2014-2015 and 2015-2016 financial years, and the 2016-2017 and 2017-2018 financial years, the Superannuation Guarantee rate is 9.5% of OTE. For the 2013-2014 financial years, the Superannuation Guarantee rate is 9.25% of OTE. For the 2012-2013 financial year and preceding financial years, the Superannuation Guarantee rate is 9%.
How to Getting Going
A financial advisor will help you decide if the salary was sacrificing is the appropriate option for you, after that exercise the best strategy for your circumstance and retirement goals. If your consultant recommends that you go ahead with salary sacrifice, the next step is to see whether your company provides salary sacrifice as an alternative. Contact us at 1300 252 167 for advice.
Since July 1, 2017, workers can pay tax-deductible superannuation contributions, or they can decide to salary sacrifice. For you, the best option may vary upon convenience, how easy it is to deal with your employer, and how quick your fund adapts to new options of tax-deductible superannuation contributions.
Updates on Salary Sacrifice
Since July 1, 2017, Australians who have an adjusted taxable income of over $250,000 will contribute 30% tax on super (the income threshold was $300,000 before July 2017), instead of only 15%. Since July 1, 2017, the top marginal income rate of tax plummeted from 47% to 45%, including 2% Medicare levy.
Before you choose to engage in a salary sacrifice agreement using super contributions, speak with your accountant or financial adviser about the tax implications or the overall implications of this strategy, and make sure that you do not financially lose out on your work package.
Since July 1, 2016, the kind of super advice that accountants or financial advisers can offer (on SMSF matters particularly) has changed. See article “SMSF advice: Is your accountant still allowed to help your fund?” by SuperGuide for more details.
There are a few simple things you can do to make your super work for you. They can all help you save cash in the long run. You can make personal contributions, you can see whether you're eligible for government co-contributions, and you can salary sacrifice into super.
Or you can search for super that you've lost and roll them all into a single fund to save on fees. If you're looking to find lost super and consolidate them into a single account, we are here to help. Just fill up the form in our Home Page and we will be in contact with you.
Salary sacrifice is really worth the sacrifice. Try to ask your boss if you can do this. It's also a good idea to get advice about salary sacrifice. You can also find out more in our website.
Here's what you need to do:
- Get your employer to put a bit of your pay into super before tax is deducted.
- You pay less tax and get your super savings growing faster.
- It's really straightforward and lots of people do it.
- Check with your employer to see if you are eligible to do it.
Disclaimer: All information on this website is of a general nature only. We have not taken into account your financial situation, needs or objectives. You need to make up your own mind and ascertain yourself if it is right for you. We recommend you read the product disclosure statement(s) and the financial services guide before making any financial decision.