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How to Salary Sacrifice to Superannuation

How to Salary Sacrifice to Superannuation

How to Salary Sacrifice to Super

I want to show you the explanation of the salary sacrifice arrangement, in the way you most likely have never seen before – real-life examples. I really hope it will open your eyes to the incredible benefit of it and how to grow your super for your retirement fast. 

We will look at the following:

  1. What is salary sacrifice, how does it work?
  2. Incredible example of the benefits for you
  3. Disadvantages of salary sacrifice
  4. Who will benefit from salary sacrifice?
  5. Unknown trap you need to be aware of when salary sacrificing to your super fund.

1. What is salary sacrifice and how does it work?

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. 

The normal income arrangement and payment between employer and employee is simple:

  • You earn your gross taxable income
  • Employer first deducts the tax payable to the ATO
  • Net income after tax is paid to your bank account.

Under salary sacrifice arrangement:

  • You earn your gross income
  • First employer deducts your salary sacrifice amount and pays it to your super fund
  • The remaining balance of income becomes your new taxable income
  • Employer deducts tax payable to the ATO
  • Net income after salary sacrifice super contribution and after tax is paid to your bank account. 

So your saving benefit comes from the difference of tax rate you pay between your MTR and superannuation contributions tax of 15%

Taxable IncomeMarginal Tax RateUp to $18,2000$18,2001 – $37,00019%$37,000 – $90,00032.5%$90,000 – $180,00037%180,000 and above45%
  • There is additional 2% Medicare to pay in addition to tax rate
  • You can actually earn up to $20,0542 before paying any tax – after applying the low-income tax offset.

Salary sacrifice is a type of concessional contribution to the super. If you are unsure what concessional contributions are, have a look at this article explaining types of contributions to super:  What is superannuation? How does super work? 

2. So let’s now see the real-life examples.

The average income in Australia is almost $85,000, but to be on conservative side, for the purpose of this exercise I picked the income of $70,000 to show you this comparison.

We have two friends –Mary and Susan – both nurses, both on $70,000p.a, and both wanting to save $10,000pa for their future. 

Mary makes the saving of $10,000 the old-fashion way – from her salary after she receives income into her bank account after paying tax.

Susan makes her savings into superannuation as a salary sacrifice. 

Savings Calculations

Outcome

Outcome

So every year, by saving $10,000 as a salary sacrifice, rather than from after-tax income, Susan is better off by $5,400 each year, which over the period of 15 years is $81,000 in her pocket.

If Susan was to invest that $5,400 every year, after 15 years of savings Susan would have additional savings of $150,595 (assuming after tax annual return of 7%)

Let’s recap benefits of salary sacrifice and savings in super:

  • Big tax savings – this is what I love about super
  • Higher living income left after putting aside similar savings
  • All future tax payable on earnings – Mary MTR growing over time. If income above $90,000 = 37%, Susan only up to 15% no matter size of investment or interest earned. 
  • Please do not forget about the concessional contribution limits of $25,000 per annum. That limit includes all your employer SG contributions, as well as your salary sacrifice or any additional concessional contributions you add to your super fund. There are some exceptions, but I will discuss them in another video. To understand different types of contributions and tax benefits of them – I created that video for you. 

3. Now, let’s see the disadvantages of salary sacrifice:

    • As I mentioned before, salary sacrifice is a type of the concessional contribution, so it is still taxed at concessional rate of 15%. This is why I underline that it is beneficial only for people with income tax rate greater that Superannuation tax rate.
    • Also, special rules apply if you earn above $250,000 – Under Division 293 tax rules, you may have to pay an additional 15% tax on some or all of your super contributions, so my recommendation is to speak with a Financial Planner to assist you. If you don’t have a financial planner, feel free to contact me to discuss your situation further. All my contact details are in the description below this video.
    •  obviously, saving in superannuation is for your long -term savings plan, as in order to have access to money, you need to meet conditions of release, such as for example retirement. If you are unsure what are the conditions of release, watch this video for full explanation. So make sure that you feel comfortable with locking your savings for many years.
    • Fees and charges – all super funds, just like all types of investments has some fees and charges. Just make sure you check them, compare with alternatives and you feel comfortable with the level of fees payable.
    • Contribution limits – as explained above it is called concessional contribution cap. 
    • Death benefit tax – if you pass away and your super balance is paid to your non-financial beneficiaries (such as your adult children for example), concessional contribution will increase the amount of tax paid by such beneficiaries. 

    You need to be aware of those negatives, but benefits far outweigh the negatives, so most certainly it is worth considering by anyone wanting to implement a smart savings plan for long-term such as your retirement. 

    4. Who will benefit from setting up salary sacrifice? 

    Well, anyone who’s MRT is greater than 15% that is the rate of tax payable by super. The higher your MTR, the greater the tax benefit and overall financial savings.

    Once you start your investing journey, you are faced with another decision – how to actually invest your money. I have created a guide “12 Principles of Investing” to make this decision easier. You will find a download link to the guide in the description below the video.

    5. Unknown trap:

    As mention at the beginning of my video, there is a little known and not talked about trap that could happen to you, which is what is known in the superannuation industry as a contribution gap. 

    Fortunately, the ATO has been on it for some time and is not as widely spread as it used to be, but it is better to be aware of it, in case this happens to you.

    If we go back to the example of Mary and Susan:

    1. Mary’s gross and taxable income is $70,000, therefore the employer contribution to super is 9.5% which is $6,650
    2. Susan’s original gross income also is $70,000, so her employer’s superannuation guarantee liability is the same, however some employers have been known to try to use the system to their advantage, and because Susan asked to salary sacrifice $10,000 to super, effectively reducing her taxable income down to $60,000 and this is the amount some employers would use for calculating the SG (Super Guarantee), which would be $5,700, $950 less. – every year. 

    On ATO website is says that the tax office each year receives approximately 33,000 employee notifications, relating to 22,000 employees who would underpay the SG liability by this method. 

    To make sure that you are not one of the casualties of such breach, review your payslip or your annual PAYG statement, check your gross income (that should include all your overtime, commissions and bonuses) and calculate if employer contribution is in fact 9.5% of that gross amount.   

    Do you agree with me that salary sacrifice is a great and very convenient way to keep on growing your super, while saving a great deal of tax at the same time? If in any doubt, just email me to discuss it further. 

    If you want to fully understand superannuation as an investment vehicle, read my article here: Superannuation – all you need to know”

    If you wish to get all tax benefits out of super through different types of contributions and which ones would work the best for you – have a look at this article: “Superannuation – Part 2 – Pay less tax”.   

    By: Katherine Isbrandt CFP®
    Money Strategist & Retirement Planner
    Principal of About Retirement

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