Salary sacrifice and super: How does it work?

This is a lower tax rate than most employees pay on their income (which can be as high as 47%), so these types of arrangements can be a good way to reduce your tax.

2. Lower tax on investment earnings

Your super funds pays a maximum of 15% on investment earnings compared with the marginal tax rates outside super (up to 47%).

3. Reduced taxable income

By putting more of your salary into your super account, you reduce the amount of income on which your income tax is calculated. This could mean paying less at tax time.

Note: Although salary sacrifice arrangements reduce the salary amount on the Payment Summary from your employer, the amount of salary packaged in these types of arrangements is still reported to the ATO by your employer. It is included when calculating government income tested benefits or payments, such as the Medicare Levy or Child Support payments.

Salary sacrifice into super: How does it work?

Case study
Jessika is aged 45 and earns $80,000 a year. She is interested in boosting her super account and potentially paying less tax, so is considering putting a salary sacrifice arrangement in place with her employer.

If she salary sacrifices $6,000 into her super, she will be $1,170 better off after-tax and she will also have more savings in her super account.

Note: SG stands for Superannuation Guarantee, the 9.5% super contributions from your employer

	No salary sacrifice	With salary sacrifice
Total salary package	$85,000	$85,000
Employer SG contribution ($80,000 x 9.5%)*	$8,075	$8,075
Salary	$76,925	$76,925
Salary sacrifice	0	$6,000
Taxable income	$76,925	$70,925
Income tax payable* (2018/2019 including Medicare Levy)	$18,086	$16,016
Take home pay	$58,839	$54,909
Total super contribution (SG + salary sacrifice)	$8,075	$14,075
Super contributions tax (15% x super contribution amount)	$1,211	$2,111
After-tax super contribution	$6,864	$11,964
Total take home pay and after-tax super contribution	$65,703	$66,873
After-tax benefit	$1,170

* 2018/2019 tax and SG contribution rates

Things to think about: 6 considerations before deciding to set up a salary sacrifice arrangement

Salary sacrificing into your super account can be a great way to build your super savings and lower you tax bill, but it’s not right for everyone. Here are some things to consider before setting up an arrangement with your employer:

1. Your debt level

If you have large debts, salary sacrificing into super means you will have less after-tax income to pay your debts.

2. Ineffective for low-income earners

If your income is under $37,000, a salary sacrifice arrangement will save very little tax. There is no tax on your income under $18,201 and the rate on income above this level and up to $37,000 is 19%.

3. Impact on salary benefits

Salary sacrifice changes your salary level and it may mean benefits you’re your holiday loading, overtime and the super contributions tied to your earnings base are lower as your salary amount is lower.

4. No deductions or tax offsets

Salary sacrifice amounts cannot be claimed as tax deductions and you do not receive tax offsets for sacrificed amounts.

5. Concessional (before-tax) contributions cap

Salary sacrificed amounts are counted towards your annual concessional (before-tax) contributions cap ($25,000 in 2018/2019), so you need to take care not to exceed your cap.

6. Potential for lower – or none – SG contributions

Your salary sacrifice contributions are considered employer – not employee – contributions, so your employer may not pay the 9.5% Superannuation Guarantee (SG) contribution on your behalf. For example, if you elect to salary sacrifice more than 9.5% of your salary into your super account, your employer may decide their SG obligations to you have been met.

How to salary sacrifice into your super account

The first step is to speak to your employer and find out if they are offer these arrangements, as not every organisation does.

For effective salary sacrificing, you need to set up the arrangement with your employer before you start the work, which usually means before the start of the financial year in which you plan to start salary sacrificing into your super account. If the arrangement is not put into place until after you have performed the work, it may be ineffective. This means you cannot decide in April or May you want a salary sacrifice arrangement to cover pay already received during the current financial year.

It’s also a good idea for the arrangement to be in writing and to clearly state all the terms of the salary sacrifice agreement, such as the amount you want to contribute, how SG contributions will be calculated and when your employer will make the contributions into your super account. Some employers only make SG contributions every quarter, but if you are paid fortnightly or monthly, your contributions could go into your super account then. That way you start earning investments returns immediately.

Warning: When salary sacrificing into super, it’s important to ensure you carefully monitor your concessional (before-tax) contributions to ensure you do not exceed your concessional contributions cap for the year ($25,000 in 2018/2019) if you have a salary sacrifice arrangement in place.

If you go over your cap amount, you will have to pay extra tax. For more information, see SuperGuide article What to do if you exceed your super contributions caps.

Similar but different: Salary sacrifice and personal super contributions

As an employee, you now have a choice between using a salary sacrifice arrangement to top up your super account or making a personal super contribution and claiming a tax deduction in your income tax return.
Note: Before 1 July 2017, tax deductions on personal contributions were only available to people who received less than 10% of their income from an employer. Generally the only people eligible were self-employed.

Both salary sacrifice and tax deductible personal super contributions are classed as concessional (before-tax) contributions and your annual cap for these types of contributions is $25,000 (2018/2019).

Note: Your employer’s SG contributions are also counted towards your annual concessional (before-tax) contributions cap, so you need to consider how much these will total before making a salary sacrifice arrangement or personal contribution for which you plan to claim a tax deduction.

10 things to consider when comparing the two strategies:

1. Not all employers offer salary sacrifice arrangements.
2. Once you set up a salary sacrifice arrangement you don’t need to do anything else during the year.
3. With salary sacrifice you receive the tax benefit immediately as part of your take-home pay, while with a personal contribution you have to wait until you lodge your annual tax return.
4. If you work casually or have an irregular work pattern, salary sacrifice may be unsuitable as you cannot alter your contribution amount between pay periods.
5. Reducing your taxable income with a salary sacrifice arrangement may affect other benefits like overtime or holiday loading.
6. Your employer may calculate your SG entitlement on your salary after deducting salary sacrifice contributions, lowering your SG payment.
7. Your employer may not process your salary sacrifice contribution into super for up to three months, making it difficult to monitor your concessional (before-tax) contributions cap.
8. An unexpected pay increase or bonus could mean your salary sacrifice arrangement could take you over the concessional contributions cap.
9. Personal contributions can be made as a lump sum at any time during the financial year, giving you flexibility if your income changes.
10. With personal contributions you can choose how much you want to contribute across the financial year and the amount you want to claim as a tax deduction.

Comparing outcomes for salary sacrifice and personal tax deductible super contributions

From a tax and super viewpoint, the end result from a salary sacrifice and personal tax deductible contribution is largely the same:

Remember: To qualify for a tax deduction for a voluntary personal super contribution, you must notify your super fund and your tax agent of your intent to claim the deduction, before you lodge your tax return.