How do superannuation salary sacrifice contributions work?

How do superannuation salary sacrifice contributions work?

Sometimes, your regular superannuation contributions just aren't enough. If you find that your compulsory super guarantee is not setting you up to meet your retirement goals, it's time to look at alternative strategies to topping up your account. One such strategy is salary sacrificing.

What is salary sacrificing?

As the name suggests, superannuation salary sacrificing is when you arrange with your employer to divert some of your future, before-tax wages into your super account. In this way, you're foregoing the immediate benefits of your regular pay in favour of the long-term advantages of building up your super. 

Since this is an arrangement between you and your employer, you will need to have a formal, written agreement for legal protection. This agreement can stipulate a variety of things, such as when the payments are to be made. You'll want to seek out financial advice before entering into such an agreement. 

What are the benefits of salary sacrificing?

Along with acting as a way to force yourself to save money for retirement, salary sacrificing's chief advantage is in the realm of tax.

Salary sacrifice contributions are concessional contributions. This means that when they're deposited into your super, rather than being taxed at your marginal rate, they get taxed at a special rate of 15 percent. Since you'll end up using this eventually, you're essentially saving money in the long run.

Are there any limitations?

There are a few things to keep in mind. For one, since this is a voluntary arrangement, your employer may not agree to the scheme — an unlikely case, but possible nevertheless. However, it might be in their best interests to agree, as salary sacrifices are considered employer contributions under the superannuation rules, and are thus tax-deductible. 

At the same time, this leaves your employer entitled to reduce the amount of your compulsory super guarantee entitlements — again, unlikely (particularly if you have a good relationship with your employer), but a possible scenario.

It is also important to remember that your money will be locked away until you satisfy a condition of release (such as retiring after your preservation age).

What rules do I have to keep in mind?

Australian superannuation is known for having many minute conditions and rules, and salary sacrificing is no different. 

For one, any such arrangement can only apply to the future income you earn. Therefore you have to set the agreement up before you earn the salary.

Secondly, there is a cap on how much you can put in your fund each year through concessional contributions. According to the Australian Tax Office, you can only contribute up to $30,000 before having your contributions taxed at 31.5 percent. From 2014/15, if you are aged 49 years or over on the last day of the financial year, you can deposit up to $35,000.

Also note that there is an age limit. If you're 65 or older, you need to pass a work test, where you must be gainfully employed for 40 hours or more over 30 consecutive days in the financial year. If you're 75 or older, you can't salary sacrifice at all. 

It may seem complicated, but if you find you're eligible, it could be a great way to top up your retirement savings. 

Did you find this helpful? Why not share this article?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about superannuation

How can I increase my superannuation?

You can increase your superannuation through a ‘salary sacrifice’. This is where your employer takes part of your pre-tax salary and pays it directly into your superannuation account. Like regular superannuation contributions, salary sacrifices are taxed at 15 per cent when they are paid into the fund.

What is salary sacrificing?

A salary sacrifice is where your employer takes part of your pre-tax salary and pays it directly into your superannuation account. Salary sacrifices come out of your pre-tax income, whereas personal contributions come out of your after-tax income.

What are reportable employer superannuation contributions?

Reportable employer superannuation contributions are special contributions that an employer makes on top of the regular compulsory contributions. One example would be contributions made as part of a salary sacrifice arrangement.

What is superannuation?

Superannuation is money set aside for your retirement. This money is automatically paid into your superannuation fund by your employer.

Can my employer use money from my superannuation account?

No, your employer can’t touch the money that is paid into your superannuation account.

What are concessional contributions?

Concessional contributions are pre-tax payments into your superannuation account. The payments made by your employer are concessional payments. You can also make concessional contributions with a salary sacrifice.

What contributions can SMSFs accept?

SMSFs can accept mandated employer contributions from an employer at any time (Funds need an electronic service address to receive the contributions).

However, SMSFs can’t accept contributions from members who don’t have tax file numbers.

Also, they generally can’t accept assets as contributions from members and they generally can’t accept non-mandated contributions for members who are 75 or older.

What are reportable superannuation contributions?

For employees, there are two types of reportable superannuation contributions:

  • Reportable employer super contributions your employer makes for you
  • Personal deductible contributions you make for yourself

How do I change my superannuation fund?

Changing superannuation funds is a common and straightforward process. You can do it through your MyGov account or by filling out a rollover form and sending it to your new fund. You’ll also have to provide proof of identity.

When did superannuation start?

Australia’s modern superannuation system – in which employers make compulsory contributions to their employees – started in 1992. However, before that, there were various restricted superannuation schemes applying to certain employees in certain industries. The very first superannuation scheme was introduced in the 19th century.

What are personal contributions?

A personal contribution is when you make an extra payment into your superannuation account. The difference between personal contributions and salary sacrifices is that the former comes out of your after-tax income, while the latter comes out of your pre-tax income.

How is superannuation calculated?

Superannuation is calculated at the rate of 9.5 per cent of your gross salary and wages. So if you had a salary of $50,000, your superannuation would be 9.5 per cent of that, or $4,750. This would be paid on top of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

How do you calculate superannuation?

Superannuation is calculated at the rate of 9.5 per cent of your gross salary and wages. So if you had a salary of $50,000, your superannuation would be 9.5 per cent of that, or $4,750. This would be paid on top of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Am I entitled to superannuation if I'm a casual employee?

As a casual employee, you’re entitled to superannuation if:

  • You’re over 18 and earn more than $450 before tax in a calendar month
  • You’re under 18, you work more than 30 hours per week and you earn more than $450 before tax in a calendar month