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- How do you benefit?
- 5 things to consider before deciding to set up a salary sacrifice arrangement
- How to salary sacrifice into your super account
- Similar but different: Salary sacrifice and personal tax-deductible super contributions
- 9 things to consider when comparing the two strategies:
- Comparing outcomes for salary sacrifice and personal tax deductible super contributions
While the sacrificing bit might sound painful, salary sacrifice is all about giving up something now to get an even bigger financial benefit later on.
Often called salary packaging, many employees choose to set up these types of arrangements with their employer. They forgo part of their salary or wages to help pay for a range of benefits like cars, school fees or extra super contributions.
To sacrifice some of your salary into your super account, you make an agreement with your employer for them to pay some of your salary straight into your super fund, rather than into your bank account with the rest of your salary. This means the money going into your super account is from your pre-tax salary.
How do you benefit?
Setting up a salary sacrifice arrangement can be a great way to save extra for your retirement and potentially improve your financial position. The main benefits are:
1. Less tax on contributions
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% with the Medicare levy in 2021-22), so these types of arrangements can be a good way to reduce your tax.
2. Lower tax on investment earnings
Your super fund pays a maximum of 15% on investment earnings compared with your marginal tax rate outside super (up to 47% with the Medicare levy in 2021-22).
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 you end up paying less tax.
| No salary sacrifice | With salary sacrifice | |
|---|---|---|
| Total salary package | $85,000 | $85,000 |
| Employer SG contribution ($85,000 x 10%)* | $8,500 | $8,500 |
| Salary | $76,500 | $76,500 |
| Salary sacrifice | 0 | $6,000 |
| Taxable income | $76,500 | $70,500 |
| Income tax payable* (2021/2022 including Medicare Levy and LITO and LMITO offsets) | $15,779 | $13,709 |
| Take home pay | $60,721 | $56,791 |
| Total super contribution (SG + salary sacrifice) | $8,500 | $14,500 |
| Super contributions tax (15% x super contribution amount) | $1,275 | $2,175 |
| After-tax super contribution | $7,225 | $12,325 |
| Total take home pay and after-tax super contribution | $67,946 | $69,116 |
| After-tax benefit | $0 | $1,170 |
* 2021-22 tax, offset and SG contribution rates
5 things to consider before deciding to set up a salary sacrifice arrangement
Salary sacrificing into your super account can be a great way to build your retirement 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 $18,201, a salary sacrifice arrangement won’t save you any tax, as there is no tax paid at this income level. In 2021-22, the income tax rate on income between $18,201 to $45,000 is 19.0% – compared to 15% for a super contribution – so you receive a small tax benefit if you put a salary sacrifice arrangement in place for some of your income.
For those on higher incomes, the tax benefit received from salary sacrificing some of your salary into your super account is more attractive.
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 ($27,500 in 2021-22), so you need to take care not to exceed your cap. From 1 July 2017 to 30 June 2021 the annual concessional contributions cap was $25,000.
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 tax-deductible super contributions
As an employee, you 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 annual 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 $27,500 (2021-22). From 1 July 2017 to 30 June 2021 the annual concessional contributions cap was $25,000.
9 things to consider when comparing the two strategies:
- Not all employers offer salary sacrifice arrangements.
- Once you set up a salary sacrifice arrangement you don’t need to do anything else during the year.
- 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.
- 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.
- Reducing your taxable income with a salary sacrifice arrangement may affect other benefits you receive like overtime or holiday loading.
- 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.
- An unexpected pay increase or bonus could mean your salary sacrifice arrangement could take you over the concessional contributions cap.
- Personal contributions can be made as a lump sum at any time during the financial year, giving you flexibility if your income changes.
- 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 results from a salary sacrifice or a personal tax-deductible contribution are largely the same:
| Salary sacrifice contribution | 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 2021-22 (including Medicare levy, plus LITO and LMITO offsets) | $14,737 | $14,737 |
| Income after tax and Medicare levy | $63,263 | $63,263 |
| Concessional contributions (excluding your employer’s SG contribution) | $12,000 | $12,000 |
| 15% contributions tax | $1,800 | $1,800 |
