Contributing some of your pre-tax salary, wages or a bonus into super could help you to reduce your tax and invest more for your retirement.
How does the strategy work?
With this strategy, known as salary sacrifice, you need to arrange for your employer to contribute some of your pre-tax salary, wages or bonus directly into your super fund.
The amount you contribute will generally be taxed at the concessional rate of 15%¹, not your marginal rate which could be up to 47%².
Depending on your circumstances, this strategy could reduce the tax you pay on your salary, wages or bonus by up to 32%.
Also, by paying less tax, you can make a larger after-tax investment for your retirement, as the case study on the opposite page illustrates
What income can be salary sacrificed?
You can only sacrifice income that relates to future employment and entitlements that have not been accrued.
With salary and wages, the arrangement needs to be in place before you perform the work that entitles you to the salary or wages.
With a bonus, the arrangement needs to be made before the bonus entitlement is determined.
The arrangement, which should be documented and signed by you and your employer, should include details such as the amount to be sacrificed into super and the frequency of the contributions.
Other key considerations
- Salary sacrifice contributions count towards the ‘concessional contribution’ cap (which is $25,000 in 2017/18) and tax penalties apply if you exceed the cap.
- You can’t access super until you meet certain conditions.
- Salary sacrificing may reduce other benefits such as leave loading, holiday pay and Superannuation Guarantee contributions.
- Another way you may be able to grow your super tax-effectively is to make personal deductible contributions.
- From 1 July 2017, most people will be able to claim a tax deduction for personal super contributions, regardless of their employment status.
- Like salary sacrifice, this strategy may enable you to boost your super tax-effectively. There are, however, a range of issues you should consider before deciding to use this strategy.
- From 1 July 2018, if certain eligibility criteria are met, you may be able to carry forward unused concessional cap amounts. This may enable you to make concessional contributions in excess of the annual cap in a future year.
¹ Individuals with income above $250,000 in 2017/18 will pay an additional 15% tax on salary sacrifice and other concessional super contributions within the cap.
² Includes Medicare levy.
SUPER TIP – Simple explanation of super strategies:
The following links are other super tips – click below
Convert your super into a tax-effective retirement income
Top up your income when cutting back work
Make insurance more affordable
Top up your super with help from the government
Convert business capital into tax-free retirement benefits
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To read more about our specialised service offers for SMSF, please click here.
Disclaimer and Warning
The information above is of a general nature only. It should not be used as a source to make financial decisions. It’s also important to note that the legislation and figures related to this topic tend to change regularly and therefore the information above may not reflect the current status. We recommend that if you are looking for advice on this matter, you should contact us.