Salary sacrificing into super can save tax and lift your retirement savings.
But, before signing up, be sure you understand how it works, so that you don’t diminish your entitlements in the process.
What is salary sacrificing?
Salary sacrificing (also known as salary packaging) allows an employee to forego part of their future entitlement to salary or wages in exchange for the employer providing other benefit/s of equal value.
In essence, salary sacrificing allows you to ‘buy’ something with your pre-tax income, rather than your after-tax income.
Salary sacrifice arrangements are normally written into the contract of employment.
What can be salary packaged?
There is no restriction on the types of benefits that you can sacrifice, but there will be different tax treatment for different types of benefits.
1. Fringe benefits – are generally not work-related, and will be subject to fringe benefits tax (FBT). Common fringe benefits include cars, property (including goods, land, buildings and shares) and expense payments (such as loan repayments, child care fees and home phone costs).
2. Exempt benefits – are work related items that are exempt from FBT. Examples include computer software, protective clothing, tools of trade, and portable electronic devices.
3. Super – contributions made to a complying super fund are exempt from FBT. Contributions made to a non-complying fund, or on behalf of somebody else (e.g. your spouse) are a fringe benefit and FBT will apply.
Who can do it?
Most employers will offer salary sacrifice into super to all employees, but there may be restrictions on who can package other fringe benefit and exempt items. You will need to ask your employer what’s on offer.
Benefits of salary sacrificing to super
There are real benefits in salary sacrificing to super:
• You’ll pay less tax;
• You’ll increase your retirement savings, and
• Once in super, investment earnings are concessionally taxed, which will be less than your marginal tax rate.
Bear in mind, though, that once in super, your money is locked away until you reach preservation age and meet a condition of release (such as retiring, or becoming permanently disabled).
EXAMPLE: KAREN BOOSTS HER SUPER BY SALARY SACRIFICING
Karen earns $90,000 before tax, excluding her employer’s super contribution. Karen reaches an agreement with her employer to redirect $10,000 of her pay into salary sacrifice super contributions. Under the terms of the agreement, Karen’s employer will maintain her pre-salary sacrifice SG contribution of 9.5%.
Figures are indicative only and based on 2016/17 tax rates and Medicare surcharge.
In this example, Karen’s take-home pay decreases by $6,415 per annum, but she will have an extra $8,500 in her super.
Be aware that, unless written otherwise into your agreement, salary sacrificing may have unintended impacts:
1. Salary sacrificed super contributions are considered to be contributions from your employer, and count towards the employer’s Superannuation Guarantee (SG) obligations.
For example, if you elect to salary sacrifice 5% of your gross salary into super, your employer will only need to contribute 4.5% to satisfy the 9.5% SG obligation. Likewise, if you elect to salary sacrifice 9.5% or more into your super, your employer would not have to make any additional contributions. This would reduce the overall value of your remuneration.
2. Salary sacrificing may reduce the amount on which your compulsory super payment is calculated.
The amount of the compulsory Superannuation Guarantee (SG) that your employer is required to pay is calculated on the basis of Ordinary Time Earnings (OTE). Fringe benefits are not counted in OTE. This means that fringe benefits will reduce your OTE and will therefore reduce the amount of the SG that an employer is required to pay. Salary sacrifice to super is not a fringe benefit, so will not reduce OTE.
An employer can still make contributions based on the pre-sacrifice earnings, however, they are not required to do so under SG laws. You will need to agree with your employer that it will maintain the full 9.5% SG payment, regardless of your salary-sacrificed component.
3. Concessional contribution caps apply.
Any super contribution made under a salary sacrifice arrangement is treated as a concessional contribution, and needs to be counted towards your concessional contributions cap. From 1 July 2017, this cap dropped to $25,000 for all ages.
Before launching into a salary sacrifice arrangement, be sure that:
- You understand the rules and implications.
- The arrangement doesn’t diminish your entitlements and that the Superannuation Guarantee is paid at your pre-salary sacrifice rates.
- Any salary sacrifice agreement is in writing.
- Once implemented, you check that you’re getting what your entitled to.
This content is intended only to provide a summary and general overview of the subject matter covered. It is not intended to be comprehensive nor does it constitute advice. We attempt to ensure that the content is current but we do not guarantee its currency. You should seek professional advice before acting or relying on any of the content.
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