Salary sacrifice is an agreed arrangement with your employer for you to receive part of your gross salary as a benefit rather than as a salary. The value of this benefit is paid from your gross salary, i.e. before tax.
This means that your gross salary is reduced by the cost of the benefit before the income tax is calculated.
The most popular form of salary sacrifice is a regular contribution into super from your gross salary.
There are some tax benefits in doing this.
Firstly, sacrificing some of your salary into super reduces your taxable salary. As a result, you may pay less income tax. Secondly, while no income tax is levied on the contribution amount sacrificed out of your salary, tax is levied on this amount when it enters the super fund.
The tax rate on these contributions is 15%1 which is lower than the marginal tax rate for most people. It is your marginal tax rate that determines the amount of any potential tax savings you receive through salary sacrifice.
The concessional contribution cap is currently $25,000 per annum for everyone, regardless of your age. If your total superannuation balance was less than $500,000 at 30 June of the previous financial year, you can make ‘carry-forward’ concessional super contributions on a rolling five year basis from 1 July 2019. Amounts carried forward that have not been used after five years will expire.
|Taxable income||Marginal tax rate2|
|0 to $18,200||Nil|
|$18,201 to $45,000||19¢ for each dollar over $18,200|
|$45,001 to $120,000||$5,092 plus 32.5¢ for each dollar over $45,000|
|$120,001 to $180,000||$29,467 plus 37¢ for each dollar over $120,000|
|$180,001 and over||$51,667 plus 45¢ for each dollar over $180,000|
Put simply, most people with a taxable income of more than $18,200 can obtain an immediate tax saving by sacrificing part of their salary and contributing that amount into their super.
This is due to their marginal tax rate being higher than the 15% tax on super contributions.
1. The tax rate is 30% if your annual income (including concessional contributions) exceeds $250,000 in that financial year.
2. Medicare levy of 2% is usually payable in addition to the marginal tax rate. Tax offsets may apply to particular income levels.
There is a cap on the concessional or pre-tax contributions you can make each financial year. It’s important to note that concessional contributions include the super guarantee contributions made by your employer and any salary sacrifice contributions, as well as any other contributions on which you may claim a tax deduction.
The concessional contribution cap is currently $25,000 per annum for everyone, regardless of your age. If your total superannuation balance was less that $500,000 at 30 June of the previous financial year, you can make 'carry-forward' concessional super contributions on a rolling five year basis from 1 July 2019. Amounts carried forward that have not been used after five years will expire.
It is important to remember that any salary sacrifice arrangement will reduce your take home pay. However, depending on your level of income, salary sacrifice can be a very tax-effective way to contribute more to your super.
However, incentives for low and middle income earners and the availability of rebates in relation to spouse contributions mean that for some people salary sacrifice may not always be the most tax efficient way to contribute to super.
Ultimately, what’s best for you will depend on your particular circumstances.
To find out what impact salary sacrificing may have on your retirement savings, visit lgsuper.com.au/peek to take a peek into the future with our Retirement Projection calculator.
If you would like to set up salary sacrificing, you can provide one of the below forms to your employer.
For further information or advice about your super investment, you can call us on 1300 LGSUPER (1300 547 873), between 8.30am to 5.00pm, Monday to Friday.
Issued by LGSS Pty Limited (ABN 68 078 003 497) (AFSL 383558), as trustee for Local Government Super (ABN 28 901 371 321). This document contains general information only and is not intended to be a substitute for advice. It does not take into account your investment objectives, financial situation or particular needs. Accordingly you should consider the information having regard to your personal circumstances and consider the relevant Product Disclosure Statement available at lgsuper.com.au/PDS before making a decision about the product.