How does salary sacrifice work
When making a salary sacrifice you effectively reduce your gross (taxable) salary, which means you could pay less income tax.
Employer super contributions are taxed at a flat 15% (equal to the lowest marginal rate of tax), and therefore the sacrificed amount could be more favourably taxed than if taken as cash salary.
It is important to remember that you generally cannot access any money you contribute to super until you reach your preservation age and retire from the workforce.
Small amounts can make a big difference
The chart below shows how salary sacrifice contributions can boost your super savings over the long term.
Just $25 extra a week from age 35 could add $58,500 to your final retirement amount. An extra $50 a week could add $117,100. That's a small extra saving now to get the lifestyle you want in retirement.
Assumptions based on AustralianSuper super calculator: Opening balance $50,000 at age 35, annual salary $60,000, 9% employer contributions, before-tax salary sacrifice contributions of $25 and $50 per week, 7.5% Balanced Option investment return, $1.50 weekly administration fee, 0.72% investment management fee, retirement age of 65. Final balances expressed in today's dollars, calculated over a 30 year investment period.* Investment returns are not guaranteed as all investments carry some risk. Past performance gives no indication of future returns.
*Source: AustralianSuper super calculator, January 2009.
How to start a salary sacrifice arrangement
- Talk to your employer about salary sacrifice
- Complete the salary sacrifice form
- Give the completed form to your employer
Important facts about salary sacrifice
Not as effective for low-income earners
If you earn below $25,000 then there may be little tax advantage to you in a salary sacrifice arrangement because the tax rate on your salary is about the same as the tax on your superannuation contributions.
Make sure you protect your existing benefits
Benefits such as compulsory employer superannuation payments, holiday loadings, shift allowances, overtime etc. that may be based on actual salary level may be reduced under a salary sacrifice arrangement – you should have a written agreement with your employer that details the basis on which these payments will be calculated.
Other tax-related issues:
Deductions
You cannot claim deductions or tax offsets for salary sacrifice contributions. This is because your employer is considered to have made the contribution. You also cannot claim a deduction for the cost of any administration fees paid to your employer to enter into and maintain a salary sacrifice arrangement.
Fringe benefits tax
A salary sacrifice contribution is not a fringe benefit and is not subject to fringe benefits tax. It should not be reported as such on your PAYG payment summary.
There are some restrictions:
- Your employer may place limitations on the amount of salary sacrifice they will allow
- You can only salary sacrifice future benefits
- You cannot salary sacrifice award payments
- You cannot decide to put bonus or commission payments into superannuation as salary sacrifice after they have been earned
- There is a limit of $25,000 per year that you may receive as Concessional Contributions (employer Superannuation Guarantee, salary sacrifice and other employer contributions). All Concessional Contributions that exceed this limit will be taxed at the highest rate of 46.5%
- Members aged 50 years or over are entitled to a higher limit of $50,000 pa until 1 July 2012, when the limit will decrease further to $25,000 for all members regardless of age. If you exceed this limit the contributions will be taxed at the highest marginal tax rate of 46.5%.
Your employer may place limitations on the amount of salary sacrifice they will allow.
More information
As well as the important information above, comprehensive information on salary sacrifice is available from the Australian Taxation Office (ATO) website or by calling them on 13 10 20.