This article explores the advantages and disadvantages of salary sacrificing part of your wage into superannuation.
Salary sacrifice is an arrangement with your employer whereby you give up some of your salary in exchange for increased superannuation contributions.
By requesting to salary sacrifice part of your wage into super, your employer will make the SG contributions, as well as your nominated salary sacrifice contributions.
There are a number of advantages and disadvantages of a salary sacrifice arrangement, as detailed below.
Advantages and Disadvantages of Salary Sacrifice
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Advantages of Salary Sacrifice
Salary sacrificing into super has many advantages including, but not limited to:
|Reduces personal income tax||Any amount contributed to super under a salary sacrifice arrangement will not be taxed at your personal tax rate.|
|Helps save||Salary sacrificing into super helps you to save for retirement in a portfolio that is inaccessible to you until you reach a certain age.|
|Reduces investment earnings tax||An advantage of salary sacrificing into super is that the amount contributed will be invested. All earnings derived from investments within a superannuation accumulation account are taxed at a maximum of 15%. Capital gains tax (CGT) is effectively reduced to only 10% within super if the asset sold was owned for longer than 12 months. This can provide considerable savings compared to investing in your own name.|
|Pay for insurances||Many people hold life insurances within their superannuation account. Salary sacrificing into super can help cover the cost of these insurance premiums and the premiums may even be tax deductible.|
Disadvantages of Salary Sacrifice
Salary sacrificing into super has disadvantages also including, but not limited to:
|Contributions tax||Salary sacrifice contributions are classified as concessional contributions. All concessional contributions incur contributions tax of 15% upon entering your super fund. Higher income earners may incur additional contributions tax. Low income earners may receive the Low Income Super Contribution.|
|Locked up||Any amount contributed to super is inaccessible until you meet a superannuation condition of release. The most common conditions of release include retirement after your superannuation preservation age or reaching age 65.|
|Fees||Most super funds charge fees based on a percentage of your balance. This means that the dollar value of your fees will increase as your balance increases. The intention is that your investment earnings within super will outweigh the fees associated.|
|Contribution limits||You are limited with how much you can salary sacrifice into super. The limit is based on the concessional contribution cap. See the calculator below.|
|Death benefits tax||Salary sacrifice contributions increase the taxable component within super. The taxable component will incur tax when paid to certain beneficiaries if you were to pass away. See the death benefits tax calculator here.|
How To Salary Sacrifice – Super
In order to salary sacrifice into super, you will need to notify your employer of how much of your wage you would like to salary sacrifice.
Your employer or payroll office will inform you of the process you need to undertake to put in place a salary sacrifice arrangement.
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You should check with your employer or payroll officer as to the frequency of when they make salary sacrifice contributions. They may require you to provide them with the weekly, fortnightly, monthly or quarterly amount (dollar value) that you would like to salary sacrifice.
Once a salary sacrifice arrangement is in place, it should appear on your payslip, together with your salary and SGC contributions. If you see SGC Fund details pending on your payslip, it may mean that you need to notify your employer of your superannuation fund and account number.
It is important to check that contributions are being paid into your super account by logging into your super fund portal, contacting your super fund provider or checking your superannuation statement.
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Salary Sacrifice Calculator
As mentioned above, salary sacrifice contributions count towards the concessional contribution cap.
The current concessional contribution cap is $25,000 per financial year.
The calculator below allows you to calculate the maximum amount that you should be able to salary sacrifice to stay within the cap, based on your wage.
Salary sacrificing is generally only beneficial up to a point where your personal income tax rate is 15% or higher, after taking into account salary sacrifice contributions, due to all salary sacrifice contributions incurring contributions tax of 15%.
If your personal income tax rate is below 15%, there is generally no benefit in salary sacrificing, as the tax on this portion of your salary will be taxed at a higher rate (15%) than your personal income tax rate; plus you will be ‘locking-up’ your funds within super.
In saying this, it can still be advantageous if you are eligible to receive the low income super contribution.
Salary Sacrifice Example
Here is an example of how a salary sacrifice example would work, including the potential tax benefits.
Gary is 52 years of age and earns $80,000 per year. He wishes to salary sacrifice $15,000 per year, as he does not need his full wage to cover lifestyle expenses and understands he cannot touch any salary sacrifice contributions until he meets a superannuation condition of release.
The tax benefit of Gary salary sacrificing in the 2018/2019 financial year is as follows:
|No Salary Sacrifice||Salary Sacrifice|
|Salary||$80 000||$80 000|
|Less Salary Sacrifice||$0||$15 000|
|Net Salary||$80 000||$65 000|
|Personal Income Tax on Salary||$18 617||$13 417|
|Super Contributions Tax||$0||$2 250|
|Total Tax Paid||$18 617||$15 667|
|Benefit of Salary Sacrificing||$2 950|
Other Types of Salary Sacrifice
Some employees have the ability to salary sacrifice rent, mortgage repayments, car leases, laptops and other bills, such as electricity and rates.
These types of salary sacrificing arrangements can also be referred to as salary packaging.
There are many pros and cons and limits with salary packaging. However, such salary sacrifice arrangements are outside of the scope of this article.
Please refer to these resources for more information on salary packaging:
Finally, you may wish to salary sacrifice as part of a salary sacrifice pension strategy, which can provide noticeable tax savings.
I hope this has given you the information that you were looking for in relation to the advantages and disadvantages of salary sacrifice arrangements.