Salary sacrifice and super: How does it work?

As salary sacrifice contributions come from your pre-tax salary, you only pay 15% on them when they enter the super system (if you earn less than $250,000) or 30% (if you earn over this amount).

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.

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

* 2018/19 tax and SG contribution rates

5 things to think about 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% (in 2020/21).

3. Impact on salary benefits

Salary sacrifice changes your salary level. It may mean benefits such as your holiday loading and overtime 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 2020/21), so you need to take care not to exceed your cap.

How to salary sacrifice into your super account

Step 1: Talk to your employer and find out if they offer these arrangements, as not every organisation does.

Step 2: Ensure you set up the salary sacrifice arrangement with your employer before you commence 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 can’t decide in April or May you want a salary sacrifice arrangement to cover pay already received during the current financial year.

Step 3: Ensure the arrangement is in writing and clearly states all the terms of the salary sacrifice agreement, such as the amount you want to contribute 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 investment returns immediately.

Step 4: Ensure your super fund receives all your salary sacrifice contributions from your employer by 30 June, or they will be counted towards your concessional contributions cap for the next financial year.

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.

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 (2020/21).

9 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 not process your salary sacrifice contribution into super for up to three months, making it difficult to monitor your concessional (before-tax) contributions cap.
7. An unexpected pay increase or bonus could mean your salary sacrifice arrangement could take you over the concessional contributions cap.
8. Personal contributions can be made as a lump sum at any time during the financial year, giving you flexibility if your income changes.
9. 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 result from a salary sacrifice and personal tax deductible contribution is largely the same:

	Salary sacrifice	Personal tax deductible contribution
Salary	$90,000	$90,000
Salary sacrifice amount	$12,000	–
Personal tax deductible contribution	–	$12,000
Taxable income	$78,000	$78,000
Tax payable in 2018/19 (including Medicare levy)	$18,457	$18,457
Income after tax and Medicare levy	$59,543	$59,543
Concessional contributions (excluding your employer’s SG contribution)	$12,000	$12,000
15% contributions tax	$1,800	$1,800