Sacrificing some of your salary into superannuation can be tax effective way to boost your savings for retirement.
What is salary sacrificing into superannuation?
Salary sacrifice is an arrangement between you and your employer where you agree to forgo part of your before-tax salary in return for your employer making super contributions of the same value.
What are the benefits?
Salary sacrificing into super may increase the level of your retirement savings and may have the added benefit of reducing the income tax you pay. This is because the ‘sacrifice’ portion goes directly into super and is generally taxed at a maximum rate of 15% contributions tax instead of your marginal tax rate.
Who can salary sacrifice?
Whether salary sacrifice is right for you will depend on your personal circumstances and income level. Generally speaking, if having a more comfortable retirement is your goal and your marginal tax rate is 19% or higher, salary sacrifice may be tax effective way to save for your retirement. If you are able to contribute more towards your retirement now, salary sacrifice may make good financial sense.
What are the caps relating to salary sacrifice?
While there are many factors that determine the appropriate amount of salary sacrifice for you, one of the main considerations is the concessional contributions cap. Contribution caps limit how much you can contribute to your super before additional tax is charged. The concessional contributions cap is $25,000 for the 2018/19 financial year regardless of age. If you exceed your concessional contributions cap the excess contributions are generally included in your assessable income and taxed at your marginal rate.
You will receive a non-refundable tax offset equal to 15% of the excess contributions. An interest charge also applies to account for the deferral of tax. Concessional contributions include, but are not limited to, salary sacrifice contributions, superannuation guarantee contributions, other employer contributions and personal tax-deductible contributions. Individuals with income plus concessional contributions greater than $250,000 for the 2018/19 financial year may have certain concessional contributions taxed at 30% (up to an additional 15%). The higher rate will not apply to concessional contributions exceeding the concessional contributions cap as these are already subject to the individual’s marginal income tax rate. You should also consider what age you intend to retire and access your super. If you are under 60 years of age, you may pay tax on withdrawing a portion of your benefit.
What are the rules?
A salary sacrifice arrangement is an agreement between you and your employer, since it is not compulsory for your employer to offer salary sacrifice
The salary sacrifice agreement must be made before you earn the salary and relate to your future earnings
Salary sacrifice contributions will be deducted from your salary before income tax is calculated and are generally taxed at a maximum rate of 15% (contributions tax) in the fund
Salary sacrifice contributions are considered to be employer contributions
Is there a downside to salary sacrificing?
Your employer may decrease your superannuation guarantee (SG) contributions because salary sacrifice contributions are considered to be employer contributions which count for SG purposes. This could reduce some of the benefits gained by salary sacrificing
Once you put money into your superannuation it is ‘preserved’. This means that it generally must remain there until you retire on or after preservation age or you reach age 65
Your employer may place a limit on the amount of your salary that can be sacrificed to superannuation
Salary sacrifice contributions count as a measure of income for many Government benefits and concessions
There is a potential to exceed the concessional contributions cap which may result in additional taxes
Superannuation and tax laws do not govern when salary sacrifice contributions deducted from your salary must be paid to your superannuation fund. You will need to address this in your salary sacrifice agreement
From 1 July 2017, wages and salary earners may wish to consider personal tax deductible super contributions as an alternative to salary sacrifice.
If you have any questions in relation to your salary sacrifice and what the impacts are for you, let us know by calling us on 08 8418 2111 or emailing us at enquire@addept.com.au.