What is salary sacrifice?
With a superannuation salary sacrifice arrangement, you agree with your employer for some of your future pre-tax salary to be paid into your super fund. This reduces your salary for tax purposes as the additional super contributions are treated as employer contributions and therefore not counted towards your assessable income. A 15% contributions tax will, however, apply to the contribution. From 1 July 2017, if your taxable income is greater than $250,000, an additional 15% tax will also apply, taking the tax on contributions to 30%.
Salary sacrifice arrangements are generally more beneficial to those on middle to higher incomes. You can try MoneySmart’s superannuation calculator as a guide to see how you could benefit from salary sacrificing into super. Better still, you can contact us for a more detailed calculation.
For more information and a case study on this super strategy, see our fact sheet on sacrificing pre-tax salary into super.
Arranging salary sacrifice with your employer
To salary sacrifice some of your pre-tax salary into super, you’ll need to arrange this with your employer. Firstly, check whether your employer offers the option to salary sacrifice, as employers are not required to provide such an option. If not, there may be another option for you, but more about that later.
If your employer does offer salary sacrificing, you’ll need to make a formal arrangement. While this can be a verbal agreement, it’s in your best interests to get it in writing, signed by both you and your employer. Where possible, include the details in your terms of employment.
Details of your salary sacrifice arrangement should include:
- Amount to be sacrificed into super
- When salary sacrifice contributions will be paid
- Whether future bonuses will be included (this needs to be done before any future bonus is determined).
As salary sacrifice contributions are employer contributions, these can count towards the Superannuation Guarantee (SG) contributions your employer is required to pay into your nominated super fund.
So, theoretically, salary sacrificing could reduce, or even eliminate, your employer’s obligation to make SG contributions on your behalf. Take the following as an example.
You earn an annual salary of $100,000 and you arrange to salary sacrifice 10% of your annual salary into super ($10,000 pa). As the employer contributions going into your super fund are now greater than the 9.5% compulsory SG contribution ($9,500 pa), your employer would not be obligated to make any SG contributions on your behalf. Or, if they were slightly more charitable, they could pay the 9.5% SG contributions calculated on your reduced taxable income of $90,000 pa.
Ideally, you want your employer to calculate the SG contribution on your original annual salary of $100,000 prior to salary sacrificing. This way, you get the maximum benefit of both less tax now and more in your retirement funds for the future.
July 1 super changes: What you need to consider
Whether you’re starting a salary sacrifice arrangement for the first time or you already have an arrangement in place, there are some important considerations in relation to the 1 July 2017 super changes. You can read more about these changes in Significant super changes from 1 July: Are you ready?
Key is the change to the concessional contributions caps. Concessional contributions include SG, salary sacrifice and tax-deductible super contributions by the self-employed. The concessional cap reduces from $30,000 (for under 50s) and $35,000 (for over 50s) to $25,000 for everyone, regardless of age, from 1 July.
Exceeding the concessional cap could result in you paying higher tax.
You’ll also need to check with your employer when they will pay salary sacrifice contributions into your super fund. This is because you may receive your salary in one financial year, but the salary sacrifice contributions may be paid at a later date, and possibly in a different financial year. This could potentially result in excess contributions issues, and potentially paying extra super tax, or extra income tax.
An alternative option to salary sacrificing
As stated above, employers are not required to provide employees with the option to salary sacrifice. If your employer does not offer salary sacrifice, don’t despair, you now have another option to build your super nest egg while reducing your income tax at the same time.
From 1 July this year, anyone under age 75 will be able to claim a tax deduction for making personal super contributions. Previously, this option was only available to those who were self-employed, substantially self-employed or not working and under age 65. You could not use this strategy if more than 10% of your income was earned from eligible employment.
If you make a personal super contribution after 1 July 2017, you may be able to claim the contribution as a tax deduction and reduce your assessable income.
The contribution will generally be taxed in the fund at the concessional rate of 15%, instead of your marginal tax rate. If you intend claiming a tax deduction for personal super contributions, you must notify your super fund in writing.
For more information and a case study on this super strategy, see our fact sheet on making tax deductible super contributions.
Talk to us today about salary sacrificing into super
Your Westlawn Wealth Adviser can help you assess whether salary sacrifice suits your needs and circumstances.
If you have any questions, or would like to learn more, contact us today:
 Individuals with income above $300,000 (in 2016/17) will pay an additional 15% tax on personal deductible and other concessional super contributions. This income threshold reduces to $250,000 in 2017/18.