Salary sacrificing into super is a great way to save on tax for most taxpayers. But like anything to do with the tax system, you’ve got to tread carefully and make sure you’ve got ‘all your ducks lined up’, otherwise you may find you end up paying more tax than intended.
How does it work?
Salary sacrifice is best explained by an example. Suppose you’re paid a $100,000 salary. You might ask your employer to put $10,000 of that straight into your super (separate to the compulsory 9% of your salary your employer already contributes), meaning you only take home the remaining $90,000 as salary. This strategy, which has certain tax benefits, is called ‘salary sacrifice’ because you forego salary so you can save for your retirement.
In this example, the tax saving arises because the $10,000 super contribution is taxed at the rate of 15% available to super funds instead of your marginal tax rate (which would be 37% for someone on that income). It also reduces your Medicare Levy and, if relevant, Flood Levies because the amount sacrificed into super is not assessable in your personal tax return.
Three common problem areas
The areas that cause problems with salary sacrifice arrangements can be boiled down to three key areas:
- employment awards and agreements, including your salary sacrifice agreement itself;
- the timing of salary sacrifice contributions; and
- excess contribution tax issues.
Watch the cap
Salary sacrifice contributions are technically employer contributions and therefore count towards your Concessional Contribution Cap, which is $25,000 for everyone as of 1 July 2012. Over the years I have answered this question hundreds of times from people who are confused by this point.
When working out how much you want to salary sacrifice, you must take into account the compulsory super contributions your employer is going to make so that your total employer contributions don’t exceed your Concessional Contribution Cap. (Don’t forget to factor in any increases to your employer-paid contributions for overtime and other temporary pay increases that you might receive.)
Have you been paid?
Any salary sacrifice agreement you have must relate to income that hasn’t been ‘earned’. For example, suppose early in the financial year your employer unexpectedly awards you a $20,000 bonus. If you asked your employer to make a salary sacrifice contribution with that bonus after it had been earned, then that would fall foul of this rule.
If your salary sacrifice arrangement deals with ‘earned remuneration’, then you’ll be deemed to have been paid this salary and will owe tax on that income.
Also note, these salary sacrifice arrangements need to be in writing.
Your employer must make sure that any salary sacrifice agreement it signs with you doesn’t cause it to breach any relevant employment agreement, award or instrument. For example, you may be employed under an Industrial Award (you and your employer may not even be aware of this), which specifies the minimum wage you can be paid. Your employer can’t allow you to reduce your salary, using salary sacrifice, below that minimum wage.
Time it right
The next issue we need to address is the timing of salary sacrifice contributions.
Employers have to pay their 9% Super Guarantee contributions within 28 days of the end of each quarter. The four quarters end on 31 March, 30 June, 30 September and 31 December. For example, the 31 March contributions have to be made by 28 April.
Many salary sacrifice agreements don’t specify when these contributions will be made, and this has the potential to cause problems.
Suppose that in one financial year, your employer makes five-quarters worth of Super Guarantee contributions plus your salary sacrifice contributions. In this case, the total contributions made by your employer are likely to exceed your Concessional Contribution Cap for that financial year.
Let’s look at an example. Assume you are 54 years old, earn $130,000 per annum and $15,000 of this is going to be salary sacrificed. Each quarter your employer will make $2,587.50 in Super Guarantee contributions. Five quarters of this contribution plus your $15,000 salary sacrifice contribution is $27,937.50, which is above your Concessional Contribution Cap of $25,000 for 2012/13.
Get it in writing
The bottom line is that your written salary sacrifice agreement should specify when an employer will make these contributions and that you’ll be formally informed – say via your payroll slip – when it is actually paid.
You should also remember that if you earn more than $45,750 in any quarter ($183,000 per annum), then your employer only needs to contribute 9% of that amount – they don’t need to pay the Super Guarantee on your full salary above this limit. By reducing your employer’s Super Guarantee contributions, you might be able to make more salary sacrifice contributions.
Also in the Switzer Super Report:
- Peter Switzer: When will the stock market recover? [1]
- George Boubouras: Four healthcare stock recommendations [2]
- Paul Rickard: Review: Seek releases a new fixed-rate hybrid [3]
- Rudi Filapek-Vandyck: The broker wrap: downgrades increase [4]
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.