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. 

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Learn more about superannuation

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.

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 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.

How much extra superannuation can I add to my fund?

There is an annual limit of $25,000 for concessional contributions – that is, money paid by your employer and extra money you pay into your account through salary sacrificing. There is also a limit on non-concessional contributions. Australians aged between 65 and 74 have a limit of $100,000 per year. Australians aged under 65 have a limit of $300,000 every three years.

Can I transfer money from overseas into my superannuation account?

Yes, you can transfer money from overseas into your superannuation account – under certain conditions. First, you must provide your tax file number to your fund. Second, if you are aged between 65 and 74, you must have worked at least 40 hours within 30 consecutive days in a financial year. (Australians under 65 aren’t subject to a work test; Australians aged 75 and over cannot receive contributions to their superannuation account.)

Money transferred from overseas will generally count to both your concessional contributions limit and your non-concessional contributions limit. You will have to pay income tax on the applicable fund earnings component of any money transferred from overseas. You might also be liable for excess contributions tax.

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

Can I buy a house with my superannuation?

First home buyers are the only people who can use their superannuation to buy a property. The federal government has created the First Home Super Saver Scheme to help first home buyers save for a deposit. First home buyers can make voluntary contributions of up to $15,000 per year, and $30,000 in total, to their superannuation account. These contributions are taxed at 15 per cent, along with deemed earnings. Withdrawals are taxed at marginal tax rates minus a tax offset of 30 percentage points.

Voluntary contributions to the First Home Super Saver Scheme are not exempt from the $25,000 annual limit on concessional contributions. So if you pay $15,000 per year into the First Home Super Saver Scheme, you have to make sure that you don’t receive more than $10,000 in superannuation payments from your employer and any salary sacrificing.

Is superannuation taxed?

Superannuation is taxed. It is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

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 is the superannuation rate?

The superannuation rate, or guarantee rate, is the percentage of your salary that your employer must pay into your superannuation fund. The superannuation guarantee has been set 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 does superannuation work?

Superannuation is paid by employers to employees, at least once every three months. The ‘superannuation guarantee’ is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary. The guarantee 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.

Superannuation is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

You can withdraw your superannuation when you meet the ‘conditions of release’. The conditions of release say you can claim your super when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

 

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 do you open a superannuation account?

Opening a superannuation account is simple. When you start a job, your employer will give you what’s called a ‘superannuation standard choice form’. Here’s what you need to complete the form:

  • The name of your preferred superannuation fund
  • The fund’s address
  • The fund’s Australian business number (ABN)
  • The fund’s superannuation product identification number (SPIN)
  • The fund’s phone number
  • A letter from the fund trustee confirming that the fund is a complying fund; or written evidence from the fund stating it will accept contributions from your new employer; or details about how your employer can make contributions to the fund

You might want to provide your tax file number as well – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.