Super Strategies – sacrifice pre-tax salary into super

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Contributing some of your pre-tax salary, wages or a bonus into super could help you to reduce your tax and invest more for your retirement.

How does the strategy work?

With this strategy, known as salary sacrifice, you need to arrange for your employer to contribute some of your pre‑tax salary, wages or bonus directly into your super fund. The amount you contribute will generally be taxed at the concessional rate of 15%¹, not your marginal rate which could be up to 47%².

Depending on your circumstances, this strategy could reduce the tax you pay on your salary, wages or bonus by up to 32%.

Also, by paying less tax, you can make a larger after‑tax investment for your retirement, as the case study below illustrates.

What income can be salary sacrificed?

You can only sacrifice income that relates to future employment and entitlements that have not been accrued.

With salary and wages, the arrangement needs to be in place before you perform the work that entitles you to the salary or wages.

With a bonus, the arrangement needs to be made before the bonus entitlement is determined.

The arrangement, which should be documented and signed by you and your employer, should include details such as the amount to be sacrificed into super and the frequency of the contributions.

Other key considerations

  • Salary sacrifice contributions count towards the ‘concessional contribution’ cap (which is $25,000 in 2020/21) and tax penalties apply if you exceed the cap.
  • You can’t access super until you meet certain conditions.
  • Salary sacrificing may reduce other benefits such as leave loading, holiday pay and Superannuation Guarantee contributions.
  • Another way you may be able to grow your super tax‑effectively is to make personal deductible contributions.
  • If you did not use up your concessional contribution cap in 2018/19 or 2019/20 and meet certain conditions, you may be eligible to carry forward the unused cap amount. This could enable you to make concessional contributions exceeding the annual cap in 2020/21 or a future financial year3.
¹ Individuals with income above $250,000 in 2020/21 will pay an additional 15% tax on salary sacrifice and other concessional super contributions within the cap.
² Includes Medicare Levy.
3 Unused cap amounts can be carried forward for up to five years. Other conditions apply. To find out more visit ato.gov.au.

Case study

William, aged 45, was recently promoted and has received a pay rise of $5,000, bringing his total salary to $100,000 pa.

He’s paid off most of his mortgage, plans to retire in 20 years and wants to use his pay rise to boost his retirement savings.

After speaking to a financial adviser, he decides to sacrifice the extra $5,000 into super each year.

By using this strategy, he’ll save on tax and get to invest an extra $1,200 each year, when compared to receiving the $5,000 as after‑tax salary and investing outside super.

Details Receive pay rise as after-tax salary Sacrifice pay rise into super
Pre-tax pay rise $5,000 $5,000
Less income tax at 39%4 ($1,950) (N/A)
Less 15% contributions tax (N/A) ($750)
Net amount invested $3,050 $4,250
Additional amount invested $1,200

4 Includes Medicare Levy. Based on 2020/21 tax rates.

Personal deductible contributions

You may be eligible to claim a tax deduction for personal super contributions, regardless of your employment status.

Like salary sacrifice, this strategy may enable you to boost your super tax‑effectively. There are, however, a range of issues you should consider before deciding to use this strategy.

Your financial adviser can help you determine whether you should consider making personal deductible contributions instead of (or in addition to) salary sacrifice.

Source: MLC Technical – You can download a print ready concept card here.

CONTACT YOUR WESTLAWN FINANCIAL ADVISER

Your Westlawn Financial Adviser can help you determine whether salary sacrifice suits your needs and circumstances.

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General Advice Disclaimer

All of the material published on this website is for information purposes only and does not constitute advice. This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a Financial Adviser, whether the information is appropriate in light of your particular needs and circumstances.
Westlawn Wealth Management Pty Ltd ABN 32 124 861 409 Corporate Authorised Representative of Affinia Financial Advisers Limited ABN 13 085 335 397 AFSL No. 237857. Please note that Affinia Financial Advisers Limited is not responsible for the advice and services provided by Westlawn Finance Limited, Westlawn Insurance Brokers Pty Ltd, Westlawn Life Insurance Pty Ltd or Westlawn Business Services Pty Ltd.

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