Salary sacrifice or personal deductible contributions, what’s better

Federal Budget – May 2024 (3)

Salary sacrifice or personal deductible contributions, what’s better

I have written many articles explaining different superannuation contributions, and most certainly the one that is the most used is either salary sacrifice for employees or personal deductible contribution mainly used by self-employed or people who sold their major assets and want to utilise the benefit of tax deduction on those contributions.

If you don’t know much about those types of contributions to super, review the following:

But if you put them side by side, which one is actually better: salary sacrifice or personal deductible?

Therefore, today I will discuss benefits and negatives of each of those types of contributions to super.

I am not sure how many of you would remember, but before 1st July 2017, in order to make personal deductible contributions, you had to meet a very specific work requirement. 10% of your work had to come from self-employment, therefore at that time, there was no possibility for employees to make any personal additional contributions to super in order to claim tax deduction with the purpose of reducing your income tax.

The change was introduced on 1st July 2017, and the strategy became widely available to everyone, subject to cap limits and age limits.

Salary sacrifice appeared to be an easier way to contribute extra funds to super via your employer, however some employers took advantage of this situation and they kept reducing employees CG, paying super contributions on the income post salary sacrifice rather then real gross income before salary sacrifice would have been applied.

That was changed on 1st January 2020, and your salary sacrifice is now included as part of the income included for SG contributions paid by employer.

So now let’s look at those two strategies from the point of pluses and minuses for each, and that might help you decide which one will work for you better: salary sacrifice or personal deductible contributions

Benefits of the salary sacrifice arrangement:

  • No brainer discipline
    once you set the payments through your employer, all payments are automated, coming out of your paycheck each time you have your payday. Therefore, you will receive the net pay after the saving to your super has already been made, and now you can do whatever you need with your pay. This is a no brainer discipline to save in your super and build it up over the long term. To learn more about concessional contributions and all the updates, watch one of my latest article: “Concessional contributions – what’s new”
  • No forms are required
    you do not need to worry about providing your super fund with any additional forms to ensure that your tax has been calculated correctly, meaning, it has been reduced according with the level of your contributions. This is done as you go by your employer with each pay you receive. Therefor no income tax adjustments need to be made anymore.
  • Dollar cost averaging
    by contributing to super on regular basis, either fortnightly or monthly, each time your money gets invested into your super, it buys investments at different value, and different price. This is what we call dollar cost averaging and it can reduce the market risk and removes the timing risk for your investment, again, ease and no brainer investing with big benefits.

So does salary sacrifice have any negatives, seems to be a perfect form of investing into super.

Negatives of salary sacrifice:

  • Some employers do not provide the salary sacrifice facility,
    which is disappointing. If this is the case, then the personal deductible contribution will need to replace the salary sacrifice, but it would need to be managed correctly
  • Salary sacrifice only works for income to be earned and not the income earned already
    this is actually often and issue where the employee received a bonus, after having it paid and realising the tax bill associated with the extra earnings, employee might ask for the salary sacrifice, but if this is set up in relation to the bonus already paid, this would be an ineffective arrangement most certainly not allowing for the intended tax outcome.
  • Easy prospect of excess concessional contributions
    I see this happening all the time. If you are not on a fix pay, or subject to bonuses, overtime pay or any other variable pay, your employer SG will also vary from month to month, making your salary sacrifice very vulnerable to take you over the allowable limit, so you need to be very careful with your additional salary sacrifice contributions.
  • Salary sacrifice can affect your income protection insurance
    if you have an Income Protection policy included in your super, before you set up your salary sacrifice, contact your insurance provider to find out if your arrangement won’t impact the income cover you have in case you have a claim.
  • Salary sacrifice contributions could be redirected to a different super fund
    In Australia we have the legislation of choice of super fund. Your employer must pay your SG contributions to the fund of your choice. This is not the case for salary sacrifice contributions; therefore, those contributions could end up in the fund of your employer choice. So always check this prior to setting up the strategy not to be disappointed.
  • Uncertain frequency of contributions
    Legislation specifies the frequency of SG contributions; however, this does not apply to salary sacrifice. Therefore, it is left up to employer how often they are willing to make those payments for employees.

Benefits of personal deductible contributions

  • Meeting eligibility rules
    To make this type of contribution you need to meet certain rules, such as be under the age of 65, or if older, between age of 65 and 74 you need to meet the work test, which means you must be gainfully employed for at least 40 hours during a consecutive 30-day period in the financial year, when the contribution is being made.
  • Flexibility of timing of your contributions
    Similarly to the salary sacrifice, you can easily set up regular investment plan from your bank account to a super fund of your choice, therefore you can achieve exactly the same outcome that the salary sacrifice arrangement has listed as benefits: dollar cost averaging, no brainer discipline
  • Super fund of your choice
    As those are your personal contributions, you can choose the fund you want. Those additional contributions can be invested in the same fund as your employer SG contributions or you can choose a different fund
  • No impact on your insurance within super, especially Income Protection
    as contributions are made with the after-tax money, your taxable income is not being reduce, therefore your contributions have no impact on your insurance cover.
  • Control not to exceed the concessional contribution cap for the year
    As you are contributing with after tax money, it is easy to calculate your employer contributions and what is the gap that you can add for the year. If you paid more, not a problem, you just advice super fund of the correct amount you wish the tax deduction and the surplus stays in the super fund as your personal non-concessional. No drama, no tax penalties.

The end of the financial year is the busy time for us financial planners and for super funds, as every person working should be checking their super contributions caps and what has been used and how much could be added if you have some spare savings.

Negatives of the personal deductible contribution:

  • Notice of intent to claim the tax deduction
    This is just about the only negative I was able to think of. If you made a personal contribution and you wish to claim tax deduction, you need to provide this form to your super fund. You fund will register your claim, withdraw 15% contribution tax from your contributions listed and advice the Tax Office accordingly.

Here it is, a comprehensive comparison of the salary sacrifice contributions versus personal deductible contributions. So, which one is the winner for you? Which one do you think would work for you best?

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

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