Guided Investor

Salary Sacrifice to Superannuation Explained

Salary Sacrifice is a term used to describe the practice of an employee directing a portion of their pre-tax income into superannuation, rather than having it paid to them personally. The benefit of this is that you can save tax. The less tax you pay, the more you have left over to invest.

When money is allocated to superannuation, it gets taxed at the superannuation rate of 15% rather than your marginal tax rate, which can be as high as 47% when the Medicare levy is included. To give you an idea of how this may work, let’s look at an example.

Example of salary sacrifice

Kriss works as an Office Manager, earning $140,000 per annum. Kriss decides to salary sacrifice $1,000 per month ($12,000 per annum) into her super, on top of her 11% SGC. By doing so, her taxable income is reduced by $12,000 but she incurs an additional 15% contributions tax on the $12,000 contributed to super. Given this, her estimated personal tax payable reduces by $4,860 but tax paid by her superannuation fund increases by $1,800. This gives Kriss a net tax saving of $2,880.

Net Income PositionCurrentProposed
Gross Income$140,000$140,000
Salary Sacrifice$0-$12,000
Tax-$39,667-$34,987
Net Income$100,333$93,013
   
Contribution Position  
Employer Contributions$15,400$15,400
Salary Sacrifice$0$12,000
Contributions Tax-$2,310-$4,110
Net Contributions$13,090$23,290
   
Total Benefit  
Net Income + Net Contribution$113,423$116,303
Total Tax Paid-$41,977-$39,097
Tax Saving $2,880

Please note, the above calculation is applicable to the 2023/24 financial year.

You receive the tax benefit each pay cycle as the amount of tax your employer pays on your behalf under the PAYG system, is reduced. In Kriss’ case, even though she was salary sacrificing $1,000 a month, her after-tax income would only reduce by an estimated $610 per month thanks to this tax saving.

Benefits of salary sacrifice

The BENEFITS of salary sacrifice include the following:

  1. Reduced tax payable: Salary sacrifice reduces your assessable income which in turn, reduces the amount of personal income tax you will pay.
  1. Boosted retirement savings: By increasing super contributions, you will have more money invested within superannuation for your retirement.
  1. Tax-efficient savings structure: Superannuation is a tax effective vehicle to save for retirement as earnings within your super fund are taxed at a maximum rate of 15%.
  1. Forced savings plan: Additional money is allocated to your retirement savings before you get to spend it. This creates a great forced savings plan and eventually you will adjust your expenditure to account for the reduced income.
  1. Employer incentives: In some instances, your employer may offer incentives to make voluntary contributions to superannuation. You need to check your employment contract to see if any incentives are available to you.

Risks of salary sacrifice

The potential RISKS of salary sacrifice include the following:

  1. Reduced take-home pay: Reducing your pre-tax income will lower your take-home pay. This means having less money available for living expenses and alternative wealth building activities such as paying down debt.
  1. Contribution cap limits: You are limited as to how much you can salary sacrifice. Salary sacrifice forms part of your concessional contributions cap limit. In the current 2023/24 financial year, the concessional contributions cap limit is $27,500. Your employer superannuation guaranteed contributions and any personal deductible contributions also count towards this cap limit. If you exceed your cap limit, you may have access to carry forward unused concessional contributions. If not, tax implications will apply. Please note, if you are currently in an untaxed fund, the standard concessional contribution cap limits may not apply to you, so you need to seek specific advice.
  1. Limited access to funds: Superannuation savings are preserved until you meet a condition of release. For most people, this condition is reaching preservation and retiring from the workforce. There are some instances where you may be able to access the benefits earlier such as release on compassionate grounds, financial hardship or under the First Home Buyer Super Saver Scheme.
  1. Understand your investment strategy and fee structure:  Before putting any additional money into superannuation, you want to ensure you understand (and are comfortable with) the investment strategy and fee structure within your super fund.
  1. Division 293 tax:  For high-income earners, if your combined income and concessional contributions exceed $250,000 in a financial year, you may face an additional 15% tax on some or all of your super contributions, totalling a 30% contributions tax.

How to implement a salary sacrifice arrangement

Implementing a salary sacrifice arrangement is relatively easy. Simply discuss this with your payroll department and they advise you on the process to get it set up.

Disclaimer

The information in this website is for general information only.

It should not be taken as constituting professional advice from the website owner – Guided Investor as Authorised Representative of Symmetry Group (AFSL 426385)

You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances.

Guided Investor is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this document.

Brad Buters Financial Planner Perth

Brad Buters

Managing Director | Financial Adviser

Helping Australians achieve financial independence.

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