Salary sacrificing is an arrangement between an employee and their employer whereby part of the employee’s salary is sacrificed for benefits of a similar value. When you salary sacrifice superannuation, you are electing to have part of your salary paid to your superfund instead of receiving this amount as wages. In doing so, you are making before-tax super contributions to your superfund, referred to as concessional contributions.
A major benefit of salary sacrificing super is that you pay less tax on the sacrificed amount. For example, say you are contemplating sacrificing $10,000 of your salary to super. If you salary sacrifice this amount, the $10,000 will be treated as a concessional contribution and therefore will be taxed in your superfund at a rate 15%. If you decide against salary sacrificing, the $10,000 will be taxed as ordinary income at your marginal tax rate, which depending on your income, could be as high as 47%. This means you could potentially have a tax saving of up to 32%. So not only are you boosting your retirement savings when you salary sacrifice super, you are also paying less income tax.
Salary sacrificing to super is more beneficial to individuals with middle to high incomes. If you are in a low income tax bracket, there may be minimised or no tax savings. The downside to salary sacrificing super is that you will not have access to that money until you reach your preservation age and/or meet a condition of release, so it may be more as you get closer to retirement age.
Individuals with incomes of over $250,000 for the 2018 financial year will pay and extra 15% on their concessional contributions due to Division 293. This means any amount sacrificed to super will be taxed at 30%. Although these individuals will be paying more tax on their concessional contributions, they still benefit from salary sacrificing to super as their marginal tax rate would be 47% on ordinary income, meaning they have a tax saving of 17%.
Pro Tip #1:
Concessional contributions include your employer’s 9.5% super guarantee contributions to your superfund as well as your own salary sacrificed contributions. Be aware that the combined total of these cannot exceed $25,000 for the 2018 financial year.
Pro Tip #2:
Another change in the 2018 financial year is that employees can now claim a tax deduction for after tax super contributions within the $25,000 cap. This allows you to make the decision closer to year end and can help with tax planning.
Author: Tessa Jachmann