The strategy To salary sacrifice into super.
Why would I do that?
If you'd like to increase your super contributions, it makes sense
to do so as tax-effectively as possible. If you're not eligible for
the super co-contribution (or if you are eligible, but would like
to contribute more), the best way to do so is to have your employer
make extra contributions for you.
Why's that?
Employer contributions can be made from your pre-tax income,
whereas any personal contributions you make come from after-tax
dollars. If you're on the 31.5 per cent marginal tax rate and want
to contribute $1000 of your gross income, you'd only have $685 to
invest if you did it yourself. Your employer, on the other hand,
could contribute the full $1000. Of course, you'd still be slugged
with the 15 per cent tax that applies to tax-deductible super
contributions when the money went into the fund, but you'd have a
net $850 working for you.
Does that make a big difference?
It can over time. BT Financial Services uses the example of Emma,
who can afford to invest $10,000 before tax and who is on the top
marginal tax rate of 48.5 per cent. Assuming the money is invested
at 7 per cent, BT calculates she would have $3500 more by salary
sacrificing into super than by taking the pay and investing
elsewhere. But after 25 years, thanks to the lower taxes on super,
she will have more than double what she would have earned in the
non-super investment.
How does salary sacrifice work?
It's a simple matter of trading off part of your pay for more
employer super. The Tax Office uses the example of Susan, who has
been offered a new job on a $50,000 salary package, comprising
$45,000 in base earnings and $5000 in super. Susan negotiates to
lift the super component to $10,000, leaving her with a taxable
income of $40,000.
Are there limits on how much my employer can contribute.
Yes.
Theoretically you can sacrifice all of your salary, but BT says
if you are paid under an award you may not be able to sacrifice to
a level that reduces your pay below your award entitlement. There
are also limits on how much your employer can contribute on your
behalf each year on a tax-deductible basis. These limits are based
on your age, and range from $13,935 for those under 35 to $95,980
for those aged 50 or more.
Smith says sacrificing a portion of your pay may also impact on
other benefits and entitlements, such as annual and long service
leave and compulsory super payments. You'll need to weigh this up
against the benefits.
Do all employers offer salary sacrifice
arrangements?
There is no legal obligation for your employer to offer such
arrangements and not all employers do so. However, it's worth
asking, as your employer loses nothing from the deal while
providing a real benefit to you.
Is the Tax Office OK with these deals?
The Tax Office has set out rules on what it will and won't accept.
The main requirement is that you can only sacrifice payments to
which you have not yet become entitled, such as future paychecks.
You can't put sacrifice arrangements in place retrospectively, by
sacrificing a bonus that you've already earned an entitlement to,
for example. People often think of lifting their super
contributions near the end of the financial year because they want
to reduce their tax bill. Salary sacrifice arrangements need to be
in place well before that. You can choose to either sacrifice a
regular amount from your pay packet or special payments such as
bonuses.
According to the Tax Office, you can also sacrifice leave
entitlements - but, again, this only applies to future
entitlements, not ones you've already accrued.
Note, too, that if you're subject to the super surcharge for
higher income earners, this will apply to your extra employer
contributions. Any income that you sacrifice is added back onto
your annual income to determine whether or not you have to pay the
surcharge.
Salary sacrificed super contributions are not hit by fringe
benefits tax, but BT points out they can count as compulsory super
contributions.
