What is salary sacrificing?

What is salary sacrificing?

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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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 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.

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.

How do you pay superannuation?

Superannuation is paid by employers to employees. Employers are required to pay superannuation to all their staff if the staff are:

  • Over 18 and earn more than $450 before tax in a calendar month
  • Under 18, work more than 30 hours per week and earn more than $450 before tax in a calendar month

This applies even if the staff are casual employees, part-time employees, contractors (provided the contract is mainly for their labour) or temporary residents.

Currently, the superannuation rate is currently 9.5 per cent of an employee’s ordinary time earnings. This 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.

Employers must pay superannuation at least four times per year. The due dates are 28 January, 28 April, 28 July and 28 October.

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.

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.

What age can I withdraw my superannuation?

You can withdraw your superannuation (or at least some of it) when you reach ‘preservation age’. The preservation age is based on date of birth. Here are the six different categories:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

When you reach preservation age, you can withdraw all your superannuation if you’re retired. If you’re still working, you can begin a ‘transition to retirement’, which allows you to withdraw 10 per cent of their superannuation each financial year.

You can also withdraw all your superannuation once you reach 65 years.

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

 

How many superannuation funds are there?

There are more than 200 different superannuation funds.

How do you get superannuation?

You’re automatically 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

How much is superannuation in Australia?

Superannuation in Australia 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 ‘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.

When did superannuation start in Australia?

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.