Concessional Contributions Part 2 – Salary Sacrifice
Superannuation has become the biggest business in Australia. Over the years the government made super more and more appealing as a form of investing, especially for the purpose of saving for the time when we no longer work, but rather want to enjoy fruits of years of our labour and finally do the things we have never been able to do before while working
Last week I created a video explaining the very basis of contributions to super – your employer contributions.
As much as it is employer’s responsibility to pay the Super Guarantee contributions to your chosen super fund, as it has impact on all the rest of your activities in your super and it has to be included in all your super, tax and retirement planning, it is essential to fully understand how SG works and what changes were introduced to SG over the years.
So please learn about SG from my article: Concessional contributions to super – what is SG?
There are two other main forms of concession contributions:
1.Salary Sacrifice
2.Personal contributions for which you claim tax deduction.
And today, I will cover the first option – salary sacrifice, which is a very important part of your savings for your retirement.
As I said before, superannuation is the biggest savings pool of funds you will ever have, so all super funds are trying to make it as appealing for you as they can, so you use their services, but you should really spend some time understanding that retirement savings system, so you can benefit the most as well.
For most people, the biggest portion of superannuation and retirement savings come from employer contributions. This is the reason why you should understand what SG is and how that works. The earlier you start, the better the outcome, so please don’t leave it to a default option.
But employer contributions is just a start, now after knowing what money your employer contributes to your super, you should check how you can improve your super, while hopefully gain other benefits as well.
One of the main points of how to decide on the type of super contributions that are beneficial for you is the level of your taxable income. The higher your taxable income, the more beneficial your concessional contributions are in terms of your annual income tax savings.
Check the tax rates table and find the tax level you pay on your gross taxable income.
What is salary sacrifice?
Salary sacrifice is your agreement with your employer for some extra voluntary contributions you want to make to super rather than receive that portion of income in your bank account after paying income tax.
For full details and I think a great explanation of all benefits of the salary sacrifice arrangement, read this article: Salary Sacrifice Australia – tips, traps, and benefits.
You will find out benefits of salary sacrifice the way you most likely have not seen before, but please keep in mind the change of the total balance that can be contributed. In that article, I did a comparison of savings of $10,000 via superannuation as a salary sacrifice arrangement and outside of super with after tax money.
Today however, we will additionally look at salary sacrifice from a slightly different angle. Who can benefit from salary sacrifice the most and what is the benefit in each case. and that is based on your marginal tax rate.
Let’s meet Kate
Kate is working part time earning $40,000. Her tax bill inclusive of Medicare is $4,942pa. Her MTR is 19%. If Kate contributes $10,000 to her superfund as a salary sacrifice, her personal tax will reduce to $2,842, so you could get excited and say, wow that’s a big savings. but let’s not forget that her $10,000 paid to super via salary sacrifice attracts 15% contribution tax, which is $1,500, therefore her total tax bill is $4,342. This is still a saving of $600pa.
Now, let’s meet Brian
Brian is on $55,000 annual income. His annual tax bill is $9,442 inclusive of Medicare. If he contributes $10,000 to super, his personal tax will reduce to $5,992. plus $1,500 contribution tax. that equals to total of $7,492. by implementing the salary sacrifice, Brian can save $2,000pa in tax. Now we are talking.
So why his savings is so much more than Kate’s?
This is because he contributed to super $10,000 from the portion of income that attracts 32.5% tax rate. So by investing this money to super, he reduced his tax rate on the remainder of his income down to 19%pa. That is Smart.
And now let’s meet Steven.
Steven earns $130,000pa. His tax bill for 2022/23 would be $35,767 inclusive of Medicare. Steven decides to contribute $10,000pa to his super fund and now his personal income tax reduced to $31,867. plus $1,500 contribution tax, therefore the total tax paid is $33,367, that is a total annual saving of $2,400.
Again Steven was smart and he just knocked down the top tax income of 37% and reduced his MTR down to 32.5%. Beautiful.
And the last person to meet is Amelia.
Amelia is a company director with total annual income of $190,000pa. She is on MTR of 45% and her tax bill is $59,967 in 2022/23 financial year.
That is a very high tax to pay. Amelia also decides to contribute $10,000 to her super. Her tax bill reduces to $55,267 and she reduces her MTR down to 37%. Together with $1,500 contribution tax, her total tax bill now is amount to $56,767. that is a whooping saving of $3,200pa.
Therefore, as you can see, the higher your MTR, the greater your tax savings if you organise your salary sacrifice arrangement with your employer correctly.
So here it is, real examples how tax can be saved for different income situations.
Please note the above calculations do not include Medicare
By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
