Booste The Balance Of Your Super With Salary Sacrifice – What Is Salary Sacrifice?
Written by: Samantha Butcher l Advisory Team
There has been a lot of focus recently on superannuation and the importance of having a nice, healthy stockpile for when you’re ready to take the road that leads to retirement. After all, it’s your hard-earned money that you have been contributing to your working life.
When it comes to finding ways to maximise your superannuation balances, we’ve previously written on downsizing your house to boost your super, new financial year – new superannuation contribution changes and the list goes on. But have you considered salary sacrificing? There’s no pot of gold at the end of the rainbow that is worth going to look for.
Salary sacrifice is a way you can reduce the tax you pay, while you build your super balance – and that to us is a double win!
What is Salary Sacrificing?
Put simply, salary sacrificing works by having some of your salary removed (sacrificed) by your employer and paid straight to your nominated superannuation fund before it is taxed and before your salary is paid to you.
Salary sacrificing is also known as salary packaging or even total remuneration packaging. You and your employer agree for you to receive less income before tax and in return, your employer pays for certain benefits of similar value for you. This, in turn, means that you pay less tax on your income.
A salary sacrifice arrangement reduces your taxable income, meaning you pay less tax on your income – a double win!
However, it is important to seek financial advice before entering into a salary sacrifice arrangement and you would need to check that your employer is open to salary sacrifice.
What Are The Advantages of Salary Sacrifice?
By having the money taken from your pre-tax salary, you could lower your taxable income. Tax is paid on superannuation contributions but only at 15% (30% for those earning over $250,000). This is significantly less than most marginal tax rates, meaning you could pay less tax.
Benefits That Can Be Included In Salary Sacrifice?
There is no restriction on the types of benefits you can include in a salary sacrifice arrangement. The important thing is that these benefits form part of your remuneration. The benefits replace what you would otherwise receive as salary.
Fringe Benefits
Some of the benefits you can include in a salary sacrifice arrangement are fringe benefits. Your employer will have to pay Fringe Benefits Tax (FBT) on the value of the benefit they provide you.
If your employer has to pay Fringe Benefits Tax, they may ask you to make an employee contribution to reduce the Fringe Benefits Tax they would have to pay.
Common fringe benefits include:
- Cars;
- Goods;
- Shares; and
- Payment of your expenses for loan repayments, school fees and childcare costs.
Superannuation
Another example of a salary sacrifice arrangement is to have some of your salary or wages paid directly into your super fund.
Salary-sacrificed super contributions under an effective salary sacrifice arrangement are considered to be employer contributions. These are not fringe benefits if your employer pays them to a complying superannuation fund.
If your employer makes super contributions for you through a salary sacrifice agreement you should be aware of how these contributions will affect your super balance.
From 1 January 2020, salary sacrifice super contributions will not:
- Reduce the ordinary time earnings that your employer is required to calculate your super entitlement on; and
- Count towards the amount of super guarantee contributions that your employer is required to make in order for them to avoid the super guarantee charge.
Salary sacrificed super contributions are classified as employer super contributions, rather than employee contributions. If you make super contributions through a salary sacrifice agreement, these contributions are taxed in the super fund at a maximum rate of 15%. Generally, this tax rate is less than your marginal rate.
Salary Sacrificing Calculator
Want to have a look at home much you could possibly contribute?
Have a look at the Super Contributions Optimiser calculator from MoneySmart to play around with the figures that you are considering.
Salary Sacrifice Limitations
Unless there are limitations specified in the terms of your employment, there is no limit to the amount you can salary sacrifice into your super fund. However, you should also consider whether the amount you wish to salary sacrifice:
- Will cause you to exceed your concessional (before-tax) contributions cap and attract additional tax – this concessional contributions cap limits the amount that can be contributed to your super fund and still receive the concessional tax rate of 15%
- Will attract Division 293A tax – this occurs when your income (including concessional super contributions and other components) is more than:
- $300,000 in one year, before 1 July 2017
- $250,000 in one year, from 1 July 2017
Contribution Caps
There are a number of contribution caps that apply to superannuation contributions made to your fund in a financial year. If you contribute more than these caps, you may have to pay extra tax.
Concessional Contributions Caps
Concessional Contributions include:
- Employer contributions (including contributions made under a salary sacrifice arrangement)
- Personal contributions claimed as a tax deduction
If you have more than one superannuation fund, all concessional contributions made to all of your funds are added together and counted towards your concessional contributions cap.
Excess Concessional Contribution Charge
The excess concessional contributions (ECC) charge is applied to the additional income tax liability that comes from including excess concessional contributions in your income tax return as taxable income.
The intent of the excess concessional contribution charge is to acknowledge that the tax is collected later than normal income tax.
The charge is:
- Payable for the year you make excess concessional contributions
- Applied from the 2013-14 income year until the 2020-21 income year
Individuals who make contributions on or after 1 July 2021 that exceed their cap, will no longer be liable to pay the excess concessional contributions charge.
Non-Concessional Contributions Cap
Non-concessional contributions include personal contributions for which you do not claim an income tax deduction.
If you have more than one fund, all non-concessional contributions are made to all of your funds are added together and counted towards the non-concessional contribution cap.
CGT Cap Amount
Under the Capital Gains Tax (CGT) cap, you can during your lifetime, exclude non-concessional super contributions from your non-concessional contributions cap up to the CGT cap amount. The CGT cap applies to all excluded CGT contributions, whether they were made between 10 May 2006 and 30 June 2007 or after 30 June 2007.
Canny Advisory + Your Financial Goals
Canny Advisory is more than just an advisory firm offering financial advice, we are experts in our fields of self-managed super funds, retirement planning, investment management and also aged care. We are the financial advisory professionals in our field.
So, how is your superannuation balance looking at the moment? if you’re looking for ways to increase the balance of your super fund and are still currently working, get in touch with our team to have a chat and find out how we can help you.
