If you’re a medium to high income earner, salary sacrificing some of your salary or wage into super could be a great idea.
(If you earn over $250,000 a year, we recommend you talk to a financial planner to see if salary sacrifice will work for you.)
Salary sacrificing to super is when you and your employer agree to divert some of your pay to your super account. By 'sacrificing' some of your pre-tax salary and putting it into your super, you generally get taxed at the special rate of 15%. That's why it's also known as making 'concessional contributions' – because there are tax concessions on these types of contributions.
Salary sacrifice can make your money work harder.
If you earn more than $37,000 a year, salary sacrifice can be a good way to grow your super. It involves giving up some of your take-home pay and putting it into your super fund instead. You generally save tax and boost your super.
If you want to sacrifice some of your salary to super, you need to enter into a formal agreement with your employer. So, your first step is to chat to someone in your payroll or human resources department.
Bradley is employed on a base salary of $80,000 plus $7,600 employer super guarantee contributions. He has $50,000 of expenses to cover. He decides to salary sacrifice $16,645. While this amount is taxed at 15% when it enters his super, it brings down his taxable income.
|No salary sacrifice||Salary sacrifice|
|Salary sacrificed super contribution||$0||$16,645|
|Employer super contribution||$7,600||$7,600|
|Contributions tax (15%)||($1,140)||($3,637)|
|Net super contributions (A)||$6,460||$20,608|
|Less sacrificed amount||$0||($16,645)|
|Total taxable income||$80,000||$63,355|
|Add low income tax offset||$0||$50|
|Net salary (B)||$60,853||$50,000|
|Net benefit (A+B)||$67,313||$70,608|
(The figures we’ve used in this table are estimates based on 2017–18 income tax rates and a Medicare Levy of 2%. It doesn’t include any personal tax offsets.)
Overall, Bradley is $3,295 better off by salary sacrificing into super. While Bradley has reduced his after-tax income, he has substantially increased his super contributions. Bradley’s net benefit (salary plus super) has increased as a result of his salary sacrifice strategy – and he can still cover his expenses.
Though many employers continue to pay your super guarantee (SG) on your full pay, your employer can decide to pay your SG on your reduced salary.
The minimum amount of super guarantee they must pay is based on your ordinary time earnings (OTE). OTE are generally what you earn for your ordinary hours of work. As entering into a salary sacrifice arrangement reduces your OTE, it may reduce the amount of super guarantee that your employer has to pay.
To make sure everything stays above board, it’s best to have a written agreement with your employer.
There are limits on the amount you can put into super each year by salary sacrifice without penalty. Salary sacrifice contributions are classed as 'concessional contributions' and also includes your employer's 9.5% contribution. Concessional contributions are limited to $25,000 each year, regardless of your age. For any amounts over these caps, you’ll pay extra tax.
Find out more about contribution caps.
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