By contributing into your super, you can reduce the amount of tax you pay while adding to your future retirement income.
What is salary sacrifice?
Put simply, salary sacrifice is where you pay a portion of your pre-tax salary or wages as an additional contribution to your superannuation account.
How does it benefit you?
When you choose to make super contributions through a salary sacrifice arrangement, the key benefits for you are:
You can pay less tax – If your annual income and concessional (before-tax) contributions total less than $250,0001, these super contributions are taxed at a rate of 15 per cent, which will generally be less than your marginal tax rate of up to 47 per cent.
You can add to your super more efficiently – If your marginal tax rate is above 15 per cent, every dollar from your pre-tax pay you put into super through salary sacrificing is worth more to you than that dollar in take-home pay, making it a tax-effective way to boost your super.
You choose the contribution amount – The amount of pre-tax pay that is salary sacrificed into your super can be adjusted to your budget which could help you maintain your current lifestyle. Adding even a small amount a fortnight could potentially increase your super balance at retirement. However, if you earn below $37,000 there may be limited advantage in a salary sacrifice arrangement. Instead, as a low-income earner you can take advantage of the government’s low-income super contribution (LISC) which is a payment of up to $500 per annum directly into your super fund.
How much can you salary sacrifice?
The current annual cap for concessional (before-tax) contributions, including salary sacrifice contributions and employer Super Guarantee (SG), is $25,000.
It’s important to note that any contributions made above the maximum concessional contributions cap will be taxed at your marginal tax rate (plus Medicare). There will also be a charge to cover the cost of collecting this tax later than normal tax.
How can you get started?
Step 1: Contact your payroll or human resources team to confirm whether they offer salary sacrificing.
Step 2: If they do, you need to look at your income and expenses, and calculate how much of your income you can comfortably give up now and invest for your future. That’s where a financial adviser can help you find the most suitable option for your individual financial situation.
Step 3: Then, if you decide to salary sacrifice into super complete the relevant form so your employer can redirect the agreed portion of your pre-tax pay to your super fund. If they don’t have a form it’s best to get this agreement in writing to ensure you can confirm the terms, to avoid any confusion.
What else do you need to know?
Don’t lose your super entitlements – Your salary sacrifice contribution is counted towards your employer contributions. As such, your employer is only required to make super guarantee (SG) payments into your super equal to 9.5 per cent of your pre-tax salary.
To avoid losing any of your entitlements, the Australian Taxation Office recommends that you clarify the terms of your salary sacrifice agreement if you want to ensure your employer still pays you the 9.5 per cent super guarantee.
Salary sacrifice is voluntary – If your employer doesn’t offer or agree to salary sacrifice arrangements and you are under the age of 75, you can claim tax deductions for personal super contributions at the end of each year, subject to the concessional contributions cap, and taking into account any previously-made super contributions for that financial year.
Get the right advice
Everyone’s financial situation is different. That’s why it’s a good idea to speak to a financial adviser who can help you secure your retirement income for the future.
Source: Colonial First State.
1 If your income plus your before-tax super contributions are greater than $250,000, you’ll need to pay an additional 15 per cent tax on the salary sacrifice contributions that take your income over $250,000.
“Capstone made everything so easy by providing all the templates and support we need which makes me feel comfortable that I am in good hands with my licensee. I would highly recommend Capstone to any fellow Accountant."
“I would recommend Capstone to any accountant seeking to become licenced within the financial services industry. Their personal service and support to me and my firm has been exceptional."
“I joined Capstone Financial Planning in 2003 as I was looking for a Group that could offer a high level of independence and freedom that came from not being institutionally owned."
Willow Wealth Management
“Compliance support and feedback is crucial to our business. The Capstone team are always there to assist us in improving and providing best advice and best practice standards. Their input is always positive and constructive."
Nicholson Financial Planning
“I would happily recommend Capstone as a licensee to other advisers. The Capstone staff are friendly, knowledgeable, and professional, and they are genuinely committed to meeting their advisers' needs. I feel very secure in the knowledge that I have Capstone backing my business.”
Acquire Strategic Advisers
“Capstone’s support has been exceptional and consistent from the time our business made the transition. Capstone is continually trying to enhance their service offerings to their advisers, at both the higher level, and more specific lower levels within our business. They are an exceptional licensee and lead from the front.”
“I can highly recommend Capstone for planners seeking an independent licensee that’s not in your face but provide quality support services. Their service and support is second to none and has allowed us to concentrate on providing our clients with a premium level of service.”
“Having been with Capstone for a number of years, one thing that really stands out is their willingness to help and can do attitude. These are qualities we really appreciate.”