Salary sacrificing into super
Salary sacrificing into super 20 March 2012 Salary sacrifice, by definition, is to give up some of your pay to receive a before-tax benefit of the same value. While you can choose to salary sacrifice into a laptop, car or other work and lifestyle items, there is also an option that can provide long-term benefits — such as salary sacrificing into superannuation.
What are the benefits of salary sacrificing into super?
Are there any restrictions on this strategy?
Salary sacrificing into super is one of the more popular and tax-effective ways to increase your retirement savings.
Generous tax concessions apply to super contributions, however, the Government has placed some restrictions on the level of concessional contributions you can make (which includes your employer’s superannuation guarantee contributions as well as salary sacrifice contributions) as well as the level of personal contributions. While your employer can contribute to super on your behalf and claim a tax deduction for an unlimited amount, if your personal concessional contributions exceed $25,000 in a year, you’ll be subject to a tax rate of 31.5 per cent (in addition to the 15 per cent tax paid by the super fund) on the excess. However, you are allowed to withdraw money from your super fund to pay this tax bill.
Not only will you increase the amount of money you have to fund your retirement, but because the amount you sacrifice is deducted from your assessable income, you may also be able to reduce your income tax liability. So, instead of paying tax at your marginal rate on the money you earn, which can be as high as 46.5 per cent, when you salary sacrifice some of your income to super, it becomes a taxable contribution. Because super is treated with tax concessions, this means that the contribution itself, plus any future income earned from your investment, will generally be taxed at a maximum rate of 15 per cent.
Between now and 30 June 2012, people aged 50 or older will be granted a higher concessional contribution limit of $50,000 (instead of $25,000) before excess tax is charged. The $50,000 limit applies for each year you’re over 50 until 30 June 2012, when it reverts to $25,000. Note: In the 2010/11 Federal Budget the Government announced that from 1 July 2012, an individual aged 50 or over with a total super balance of less than $500,000 can make concessional contributions up to $50,000 each year. This announcement has not been legislated yet.
Your future
Bridges | Salary sacrificing into super
Things to consider A salary sacrifice strategy is best used by those who can afford to forgo the liquid income. Super is a long-term investment so, if you think you may need to access these particular funds before retirement, a salary sacrifice strategy may not be an appropriate strategy for you.
Generally, salary sacrificed funds will have been taxed at 15 per cent and once you retire you can access the funds tax‑free and pay off outstanding debts. Make sure your employer’s processes can support your decision to salary sacrifice, and it’s a good idea to have a written agreement with your employer before making the contributions.
For example, some younger people may benefit more from paying off non‑deductible debt (such as a home loan) instead.
Case study 1 Sandra is an auditor for a ‘top five’ accounting firm. Having just received a salary increase of $10,000, she decided to start planning for her retirement and put her salary increase into superannuation. Sandra knew there were two options for her to contribute to her superannuation. Option 1: She could arrange to salary sacrifice $10,000 of her annual salary (in pre-tax dollars) into her superannuation fund, OR Option 2: She could make additional personal contributions, up to the equivalent post tax amount, to her superannuation fund at any time during the year. Let’s look at the two options to determine which one provided the greatest end benefit: Option 1: Salary sacrifice
$
+ 10,000
Gross contribution Contributions tax 15%
– 1,500
Net super investment
= 8,500
Assume 8% earnings on average investment
+ 340 (obtained as 8,500/2 x 8%)
15% tax on earnings Investment after 1 year
– 51 $8,789
Option 2: Personal (after tax) contribution Gross contribution
$
+ 10,000
Income tax @ 46.5%*
– 4,650
Net amount super investment
= 5,350
Assume 8% earnings on average investment 15% tax on earnings Investment after 1 year
+ 214 (5,350/2 x8%) – 32 $5,532
* Includes Medicare levy and assumes top marginal tax rate.
As you can see, in Sandra’s case, salary sacrifice is certainly the most effective option, with an increased superannuation benefit of $3,257 after one year. Of course, everyone’s situation is different and it’s important to seek professional financial advice from your Bridges financial planner, in order to determine what’s appropriate for your circumstances.
A salary sacrifice strategy not only increases your super, but could reduce your tax. It’s a win-win strategy. Ask your Bridges financial planner for more information.
This is general advice only and has been prepared without taking into account your particular objectives, financial situation and needs. Before making any investment decision based on the information or advice contained, expressly or implicitly, in this brochure, you should assess your own circumstances or seek advice, including taxation advice. To the extent permitted by law, Bridges, its employees, consultants, advisers and officers are not liable for any loss or damage arising as a result of any reliance placed on the contents of this brochure. A Product Disclosure Statement (PDS) for the products outlined in this brochure is available from your financial planner, which you should consider before deciding whether to aquire these products. You may also contact our Client Advisory Services on 1800 221 151 (freecall) between Monday and Friday 9.00am to 6.00pm (Sydney time). Part of the IOOF group.
WMA-8143 0312
Bridges Financial Services Pty Ltd (Bridges). ABN 60 003 474 977. ASX Participant. AFSL No 240837.
What are the benefits of salary sacrificing into super?
Are there any restrictions on this strategy?
Salary sacrificing into super is one of the more popular and tax-effective ways to increase your retirement savings.
Generous tax concessions apply to super contributions, however, the Government has placed some restrictions on the level of concessional contributions you can make (which includes your employer’s superannuation guarantee contributions as well as salary sacrifice contributions) as well as the level of personal contributions. While your employer can contribute to super on your behalf and claim a tax deduction for an unlimited amount, if your personal concessional contributions exceed $25,000 in a year, you’ll be subject to a tax rate of 31.5 per cent (in addition to the 15 per cent tax paid by the super fund) on the excess. However, you are allowed to withdraw money from your super fund to pay this tax bill.
Not only will you increase the amount of money you have to fund your retirement, but because the amount you sacrifice is deducted from your assessable income, you may also be able to reduce your income tax liability. So, instead of paying tax at your marginal rate on the money you earn, which can be as high as 46.5 per cent, when you salary sacrifice some of your income to super, it becomes a taxable contribution. Because super is treated with tax concessions, this means that the contribution itself, plus any future income earned from your investment, will generally be taxed at a maximum rate of 15 per cent.
Between now and 30 June 2012, people aged 50 or older will be granted a higher concessional contribution limit of $50,000 (instead of $25,000) before excess tax is charged. The $50,000 limit applies for each year you’re over 50 until 30 June 2012, when it reverts to $25,000. Note: In the 2010/11 Federal Budget the Government announced that from 1 July 2012, an individual aged 50 or over with a total super balance of less than $500,000 can make concessional contributions up to $50,000 each year. This announcement has not been legislated yet.
Your future
Bridges | Salary sacrificing into super
Things to consider A salary sacrifice strategy is best used by those who can afford to forgo the liquid income. Super is a long-term investment so, if you think you may need to access these particular funds before retirement, a salary sacrifice strategy may not be an appropriate strategy for you.
Generally, salary sacrificed funds will have been taxed at 15 per cent and once you retire you can access the funds tax‑free and pay off outstanding debts. Make sure your employer’s processes can support your decision to salary sacrifice, and it’s a good idea to have a written agreement with your employer before making the contributions.
For example, some younger people may benefit more from paying off non‑deductible debt (such as a home loan) instead.
Case study 1 Sandra is an auditor for a ‘top five’ accounting firm. Having just received a salary increase of $10,000, she decided to start planning for her retirement and put her salary increase into superannuation. Sandra knew there were two options for her to contribute to her superannuation. Option 1: She could arrange to salary sacrifice $10,000 of her annual salary (in pre-tax dollars) into her superannuation fund, OR Option 2: She could make additional personal contributions, up to the equivalent post tax amount, to her superannuation fund at any time during the year. Let’s look at the two options to determine which one provided the greatest end benefit: Option 1: Salary sacrifice
$
+ 10,000
Gross contribution Contributions tax 15%
– 1,500
Net super investment
= 8,500
Assume 8% earnings on average investment
+ 340 (obtained as 8,500/2 x 8%)
15% tax on earnings Investment after 1 year
– 51 $8,789
Option 2: Personal (after tax) contribution Gross contribution
$
+ 10,000
Income tax @ 46.5%*
– 4,650
Net amount super investment
= 5,350
Assume 8% earnings on average investment 15% tax on earnings Investment after 1 year
+ 214 (5,350/2 x8%) – 32 $5,532
* Includes Medicare levy and assumes top marginal tax rate.
As you can see, in Sandra’s case, salary sacrifice is certainly the most effective option, with an increased superannuation benefit of $3,257 after one year. Of course, everyone’s situation is different and it’s important to seek professional financial advice from your Bridges financial planner, in order to determine what’s appropriate for your circumstances.
A salary sacrifice strategy not only increases your super, but could reduce your tax. It’s a win-win strategy. Ask your Bridges financial planner for more information.
This is general advice only and has been prepared without taking into account your particular objectives, financial situation and needs. Before making any investment decision based on the information or advice contained, expressly or implicitly, in this brochure, you should assess your own circumstances or seek advice, including taxation advice. To the extent permitted by law, Bridges, its employees, consultants, advisers and officers are not liable for any loss or damage arising as a result of any reliance placed on the contents of this brochure. A Product Disclosure Statement (PDS) for the products outlined in this brochure is available from your financial planner, which you should consider before deciding whether to aquire these products. You may also contact our Client Advisory Services on 1800 221 151 (freecall) between Monday and Friday 9.00am to 6.00pm (Sydney time). Part of the IOOF group.
WMA-8143 0312
Bridges Financial Services Pty Ltd (Bridges). ABN 60 003 474 977. ASX Participant. AFSL No 240837.
