What is salary sacrificing?



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A growing number of Australians feel less secure about their financial future and believe they need over $1 million to retire comfortably.

And the statistics aren’t encouraging for women, who on average retire with around half as much (53 per cent) superannuation as men.

Finding additional ways to increase your super balance could help you live a comfortable post-working life. This is where making salary sacrifices comes into play.

How do superannuation contributions work?

Employers are legally required to pay 9.5 per cent of ordinary time earnings in superannuation towards every employee over the age of 18 earning more than $450 a month. This is the Super Guarantee.

What is salary sacrificing?

According to the Australian Securities and Investments Commission (ASIC), salary sacrificing is “an arrangement between you and your employer where a portion of your pre-tax salary is used to provide benefits of a similar value”.

This is not necessarily a superannuation-only sacrifice, and this money can be used for anything from holidays, cars, weddings, school fees etc.

Salary sacrificing to super is an arrangement where you and your employer pay this nominated portion of your pre-tax salary as an additional concessional contribution to your super account.

How do I salary sacrifice my superannuation?

The process of salary sacrificing involves your employer paying this pre-tax portion of your pay into your super fund. These contributions are taxed at a rate of 15 per cent, which can be an attractive incentive to salary sacrifice as it is lower than the marginal tax rate.

You will need to discuss this with your employer and ensure you get this arrangement in writing, including your employer guaranteeing the continuation of paying your super guarantee payments on your gross income before salary sacrificing.

What are the benefits of salary sacrificing?

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Apart from the added benefit of boosting your retirement savings, making salary sacrifices can help you to save money in the long run.

The portion of your salary you sacrifice to super is only taxed at 15 per cent, rather than being taxed at your marginal rate.

What are the downsides of salary sacrificing?

Millions of Aussies have been shortchanged on their super contributions under the current Superannuation Act, as there is no distinction between contribution from salary sacrificing or an employer contribution.

Effectively, your employer can calculate your 9.5 per cent guaranteed super payment from your post-salary sacrifice income level. However, things are looking up for salary sacrificing Aussies.

In 2017, Financial Services Minister Kelly O’Dwyer announced new legislation that would prevent companies from reducing the amount of superannuation contributions they pay workers if they choose to salary sacrifice. This will also force employees to pay back workers their full superannuation entitlements.

Pros
  • Increase retirement savings.
  • Pay less tax.
Cons
  •  If not carefully monitored, your employer can end up calculating your super guarantee payments on your gross income after salary sacrificing.

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Things to consider before salary sacrificing?

According to the Australian Taxation Office, you should consider whether the:

  • Additional salary you wish to sacrifice will cause you to exceed your concessional (before-tax) contributions cap and attract additional tax – this cap limits the amounts that can be contributed to your super fund and still receive the concessional tax rate of 15 per cemt
  • Salary amount you sacrifice will attract Division 293 tax – this occurs when you have an income and concessional super contributions of more than:
    • $300,000 in one year, before 1 July 2017
    • $250,000 in one year, from 1 July 2017
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