Salary sacrifice is a tax effective way to increase your superannuation balance. In essence it involves voluntarily sacrificing some of your salary into your superannuation account.
It is very simple to implement; you simply notify your employer that you wish to salary sacrifice x% or $x of your future salary into super and make a salary sacrifice agreement to that effect. There are however some potential negatives to salary sacrificing and things to be mindful of which are listed at the end of this article.
Salary sacrificed contributions are taxed at 15% and if this is lower than your marginal tax rate then you can benefit from salary sacrifice. The 2012/13 tax rates are:
|Income Range||Tax Rate||Tax on Salary Sacrifice|
|$0 – $18,200||0%||15%|
|$18,201 – $37,000||19%||15%|
|$37,001 – $80,000||33%||15%|
|$80,001 – $180,000||37%||15%|
Salary Sacrifice also assists some people by increasing the Low Income Tax Offset and/or lowering the medicare levy.
Some worked examples are as follows:
A $50,000 income with $10,000 salary sacrificed into super will save $2,050 in tax. It will reduce take home pay by $6,450 but increase the superannuation balance by $8,500. In essence the $6,450 of after tax money “sacrificed” has provided an immediate 31.7% return to overall wealth.
A $100,000 income with $10,000 salary sacrificed into super will save $2,350 in tax. It will reduce take home pay by $6,150 but increase the superannuation balance by $8,500. In essence the $6,150 of after tax money “sacrificed” has provided an immediate 38.2% return to overall wealth.
A $200,000 income with $7,000 salary sacrificed into super will save $2,205 in tax. It will reduce take home pay by $3,745 but increase the superannuation balance by $5,950. In essence the $3,745 of after tax money “sacrificed” has provided an immediate 58.8% return to overall wealth.
As can be seen from the above, salary sacrifice offers tangible benefits, and this is especially the case for higher income earners.
The clear negative to salary sacrifice is that the contributions are preserved in super until you meet a condition of release which is usually retirement. There are some other things to be aware of as well:
- Employers do not have to offer employees the ability to salary sacrifice,
- Employers could pay their 9% Super Guarantee contributions on your “lower” income,
- Employers could use your “lower” income whilst calculating holiday pay, sick leave & long service leave,
- Employers can charge an administration fee,
- Do not exceed the concessional contribution cap of $25,000 per financial year. Concessional contributions include, among other things, salary sacrifice and the employer 9% SG contributions. (This is why the $200,000 income example above, which would create an $18,000 SG employer contribution, was reduced to $7,000 salary sacrifice)
It is therefore essential to speak with your employer to find out whether it is allowed and whether your employer will reduce any payments to you – fortunately I am yet to hear of an employer who does.