Salary sacrifice is when you, the employee choose to give up a portion of your salary to go into your super fund. It’s a voluntary arrangement between you and your employer set up at the beginning of the financial year. The amount you nominate is taken out of your pre-tax salary. This means that you have a larger retirement fund in the long run and while reducing your current taxable income.
The Salary Sacrifice Arrangement
In order to start contributing to your super, you need to speak with your employer and form an arrangement before you start work. It’s important to note that some employers do not offer such salary arrangements.
It is best you communicate in writing with your employer to avoid any confusion later on. You should set out all terms of the salary sacrifice like the amount to being sacrificed and when it will be deducted with your employer. This can be as simple as sending an email requesting $X to be cut from your salary every month and put into your super fund.
You may also sacrifice any benefits that you receive as a part of your salary. For example, you may forgo fringe benefits such as using a company car, shares and bonds, loan repayments, etc. and put that amount towards your salary sacrifice.
There are technically no limitations on salary sacrifice (unless your employment agreement states otherwise). Nevertheless, here are some things you should consider before you decide to enter into a salary sacrifice arrangement.
What is your financial situation?
Salary sacrifice may be ineffective or impractical when you have other financial commitments like debt. Once you sacrifice your salary, there is no way you can access it until you’re 60 or have reached the preservation age (usually between 55-60) and are completely retired. You should only be sacrificing your salary if you are financially stable enough to do so because you won’t have access to that money for a long time.
Who can sacrifice their salary?
Technically anyone is able to salary sacrifice. However, for people in some tax brackets, there are very few advantages of doing so. If you earn less than $37,000 there may be very few tax benefits of doing. The 15% tax you pay on your salary sacrifice might be more than your income tax.
Before entering into the agreement you should also be aware of the concessional caps for the financial year (pre-tax contribution caps). For the 2019-20 financial year, your salary sacrifice, combined with your employer’s 9.5% cannot cross $25,000. For example, if your employer’s 9.5% super contribution came to $10,000, the maximum amount you could sacrifice before crossing the threshold is a further $15,000. If you do contribute over $25,000, your tax rate will be higher than the standard 15%. However, you are able to withdraw up to 85% of any excess amount.
Division 293 Tax
Division 293 Tax increases the amount of tax you pay if you cross the Division 293 threshold. The threshold is calculated as the combined value of your income and super contributions. If this amount is greater than $250,000, then your salary sacrifice contributions are taxed an extra 15%. This applies even if your contribution is within the concessional cap.
Division 293 Tax ensures fairness among higher and middle-level income groups by reducing the benefits high-income earners receive to match the standard concessions. This is the case even if you end up with a higher salary due to a one-off event. For example, if receiving severance pay puts you over $250,000 and you decide to sacrifice $24,000 to your super fund, your contribution will be taxed 30%.
Your employer can reduce the amount they contribute to your super because salary sacrifice can replace your employer contributions. So for example, if you sacrifice 8% of your salary, your employer would only contribute 1.5%. Similarly, if you wanted to sacrifice 10% of your income, then your employer’s liability would be completely offset. Therefore, it is important you negotiate with your employer to keep paying their 9.5% super guarantee contribution.
Some employers may calculate their 9.5% super guarantee contribution based on the salary after salary sacrifice. This would reduce the amount of super your employer ends up paying. However, most employers are not likely to do this but it is something you should raise with your employer.
Salary sacrifice is a great way to boost your super fund and reduce your taxable income. It is most beneficial when:
- You are financially stable enough to do so and have a detailed written agreement that still ensures your employer is making their required contributions.
- Your contributions are under the $25,000 concessional cap and your salary is under the Division 293 Threshold.
You also need to be aware of any limits your employment contract places on salary sacrifice arrangements. If you are unsure about any term in your employment contract, speak with an employment lawyer.
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