Salary sacrificing is a simple, effective and surprisingly painless way of adding to your superannuation and thus your retirement income – and it can come with some excellent tax advantages.
Put simply, salary sacrificing is a pre-tax contribution from your income to your super account, so you’ll have more money to enjoy in retirement. These pre-tax contributions reduce your income tax straight away as it reduces your taxable income.
In Australia, most employers can handle salary sacrifice for their employees, so you can contribute a bit each month.
How does salary sacrificing work?
The first step is to look at your income and expenses, and work out how much of your income you can comfortably give up now, and invest for your retirement.
Then you need to arrange with your employer to regularly redirect that amount of your wage to your super account instead of your bank account or pay check. This must be in writing.
The Australian Taxation Office will then treat that portion of your income differently for tax purposes – that is, you only pay 15% tax on that sacrificed amount compared to your normal marginal tax rate which in most instances is considerably higher.
Any payment made by your employer as part of your salary sacrifice agreement must be in addition to the compulsory Superannuation Guarantee. That means, your employer shouldn’t include any part of your salary sacrifice into their mandatory super contributions. To avoid any confusion agreements to salary sacrifice with your employer are required to be in writing and must clearly state the base salary and amount being sacrificed from wages to super or other benefit. You can withdraw your agreement at any time.
I get tax benefits?
The amount you salary sacrifice is only taxed at 15%. That means that if your PAYG tax rate is higher than 15% tax on your salary, you will pay a lower tax rate on the amount you salary sacrifice. This is called a tax concession.
If you earn below $37,000 there may be very limited advantage in a salary sacrifice arrangement, so a Government co-contribution is likely to be a more effective way to boost your super.
There is a limit though
To prevent high income earners using salary sacrificing as a way of avoiding lots of tax, there is a limit on the amount you can contribute each year.
If you’re not yet 50, then in 2014/15, the total of your salary sacrifice contribution plus the 9.5% super guarantee contribution (paid by your employer) should not exceed $30,000. If you are 50 or over you can contribute up to $35,000. Any amount above this will be subject to the normal tax rate, not the concessional 15% rate.