If you are earning more than you need to live comfortably, salary sacrificing may be an attractive option to reduce your tax, boost your superannuation and prepare for a more comfortable retirement later on.
What is salary sacrificing?
Salary sacrificing simply involves having part of your salary paid into a superannuation fund by your employer rather than receiving it as income. These contributions are not included as part of your assessable income, reducing your income tax burden.
But you can’t have it all your own way. Salary sacrificing is such an attractive strategy but beware of exceeding the concessional contributions cap which will negate any tax benefits. Staying under your applicable limit will mean salary sacrificed contributions attract only a 15% contributions tax. This is significantly less than you would pay in income tax if you received it as income. You will also need to have a formal agreement in place with your employer. And importantly, you won’t be able to access the money until you reach your preservation age. Depending on your year of birth you may have to wait until you turn 60 before you can access your super.
A salary sacrificing case study
Karen is promoted to a senior management role and her annual salary increases from $70,000 to $80,000 per annum. She is offered the option of having the additional remuneration paid directly into her superannuation (salary sacrifice) or receiving it as income, which she could then contribute to superannuation. The following table compares the different outcomes of the two strategies including the first year’s earnings on the contribution.
|Without Salary Sacrifice||With Salary Sacrifice|
|Less: salary sacrifice||–||$10,000|
|Additional assessable income||$10,000||–|
|Less: Income tax (32.5%)||$3,250||–|
|Less: Medicare levy||$200||–|
|Additional income after tax||$6,550||–|
|Personal contribution into superannuation||$6,550||–|
|Less: Superannuation contributions tax (15%)||–||$1,500|
|Net contribution into superannuation||$6,550||$8,500|
|Earnings on additional superannuation (7%)||$230||$298|
|Less: tax on superannuation earnings (15%)||$35||$45|
|Superannuation earnings after tax||$195||$253|
|Additional income (inc. superannuation earnings)||$10,230||$10,298|
|Total boost to superannuation||$6,745||$8,753|
A win for Karen
There is an obvious win-win for Karen by sacrificing the additional remuneration to super – she pays less tax and increases her superannuation balance by a larger amount.
If you want to take advantage of saving tax through salary sacrificing to super, come and talk to us. We can assist you in determining if it’s right for you, and if so, set up an effective arrangement to maximise your benefits in both the short and long term.
Australian Taxation Office www.ato.gov.au
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