Salary sacrificing superannuation, by making before-tax super contributions, is a popular strategy for employees on middle-to-high incomes. The deal is that you increase your superannuation balance (and pay 15% contributions tax, and for those earning an adjusted taxable income of more than $250,000, pay 30% tax on super contributions) while reducing the amount of income tax payable (up to 49.5% including Medicare levy) on your salary or wages.
Super alert! From 1 July 2017, employees will be able to make tax-deductible super contributions, or they can choose to salary sacrifice. The best option for you may depend on convenience, how easy your employer is to deal with, and how fast your super fund adapts to the new option of tax-deductible super contributions.
1. How does salary sacrificing work?
Under a superannuation salary sacrifice arrangement, your employer can make additional super contributions when you arrange for some of your pre-tax salary to be paid into your super fund. Your salary for tax purposes is then reduced while the additional contributions are treated as employer contributions. As employer contributions, you don’t pay income tax on these amounts (although ‘contributions’ tax of 15% is deducted from the contribution, and an additional 15% tax if your adjusted taxable income is more than $250,000). Your employer receives a tax deduction for the super contribution, just as the employer would have received a deduction when paying you cash salary.
2. A salary sacrifice contribution is a concessional contribution
Any super contributions made under a salary sacrifice arrangement are treated as concessional contributions and need to be counted towards your concessional contributions cap (see Super Fact No 8). Special contribution rules apply for Australians aged 65 years and over, and voluntary contributions are not permitted for Australians aged 75 years and over.
Super alert! From 1 July 2017, the annual concessional contributions cap has dropped to $25,000 for all ages.
3. Two special cases for low-income earners and high-income earners
I have some good news, and I have some bad news:
- If you earn less than $37,000 a year, you may have your contributions tax refunded. For more information on the Low Income Super Contribution (to be renamed the Low Income Superannuation Tax Offset)
- Since 1 July 2012, if your adjusted taxable income is greater than $300,000, then the contributions tax on your concessional contributions, such as salary sacrifice and Superannuation Guarantee contributions, is 15% PLUS an additional tax of 15%, taking the total tax on your concessional contributions to 30%. Note that the $300,000 threshold has been lowered to $250,000 from 1 July 2017, which means more Australians will be paying higher taxes on concessional super.
4. Your employer may not agree to salary sacrifice
Salary sacrificing is a voluntary arrangement between an employee and employer. An employer does not have to consent to putting such an arrangement in place for his or her employee. If your employer does not consent to such an arrangement then you will not be able to salary sacrifice. Even when your employer refuses to allow you to salary sacrifice super contributions, your employer is still required to make compulsory Superannuation Guarantee contributions on your behalf.
From 1 July 2017, employees in such circumstances may have another option. Taking effect from 1 July 2017, all individuals under the age of 75 will be able to claim tax deductions for personal super contributions, subject to the concessional contributions cap, and taking account of previously-made super contributions for a financial year. This measure will assist Australians who work for employers who don’t accommodate salary sacrificing.
5. Get your arrangement in writing, and have it signed before the contributions commence
A salary sacrifice arrangement is a contractual arrangement between you and your employer. For your own protection, a written salary sacrifice agreement ensures you can confirm the terms of the agreement, if there is any confusion. You can even include the timing of the payment of the super contributions in the agreement. Will it be paid at the same time as you receive your weekly, fortnightly or monthly pay, or does the employer intend to pay the super contributions less regularly than your regular pay? For example, some employers pay compulsory Superannuation Guarantee contributions quarterly, and an employer may decide to delay direction of your voluntary super contributions until the business pays SG contributions. Always check the timing of super contributions.
6. Do you have a pretend salary sacrifice arrangement in place?
For the 2017/2018 year, the law requires an employer to pay the equivalent of 9.5% of an individual’s ordinary time earnings (typically wages or salary) into a super fund under the Superannuation Guarantee (SG) laws. A person’s ordinary time earnings (for the purposes of SG) is generally ordinary hours of work although it can also include over-award payments, and any shift loading and commissions, but not overtime.
Note that the equivalent of 9.5% of your wages or salary can mean different SG amounts depending on how, or if, you negotiate a salary package. Depending on your contract or award, if you earn, say, $80,000 a year, this salary amount may include your SG entitlement or you may receive 9.5% SG in addition to the $80,000 salary. If the $80,000 includes SG entitlement then your cash salary is $73,059 and your SG entitlement is $6,941. If your SG entitlement is in addition to your $80,000 salary amount, then your super fund receives $7,600 in SG contributions, and your total package works out to be $87,600.
A little word like ‘including’ can make a huge difference financially.
Note: Legislation recently introduced into Federal Parliament will, if passed, ensure that a person’s superannuation salary sacrifice contributions cannot be used to reduce an employer’s compulsory SG obligations.
7. Don’t lose your SG entitlements
A relatively unknown loophole in the SG rules enables an employer to cut an individual’s SG entitlements when an employee reduces their taxable salary via a salary sacrificing arrangement. If an employer cuts an individual’s SG entitlements when the employee enters a salary sacrifice arrangement, this in effect cuts the employee’s total salary package, unless the employee has a written contract specifying a total amount.
For example, say, Joan earns $95,000 a year plus SG. Joan can expect to receive $9,025 in SG contributions taking her total entitlements to $104,025. Joan has been chatting to her adviser who suggests that a tax-effective way to accumulate more super is to salary sacrifice. Instead of paying 39% tax (37% plus 2% Medicare levy) on any income that exceeds $87,000 (for the 2017/2018 year), Joan can divert money to her super fund, which means 15% tax is deducted from the before-tax super contributions rather than 37% income tax if she takes the salary as cash. Any taxable income below $87,000 but above $37,000 is taxed at 32.5 cents in the dollar plus Medicare levy (for the 2017/2018 year).
8. Watch your contributions cap
Your salary sacrificed contributions and your employer’s Superannuation Guarantee contributions and any additional employer contributions count towards your concessional (before-tax) contributions cap. For the 2017/2018 year, you can make concessional contributions worth up to $25,000 before you have deal with excess contributions issues.
Your concessional contributions will be subject to a maximum of 15% tax (or 30% tax if your adjusted taxable income is more than $250,000 for the 2017/2018 year), which generally means such a strategy is tax-effective only for employees paying more than 15 cents in the dollar income tax.
Warning: If you do exceed your concessional cap, the excess contributions can also count towards your non-concessional (after-tax) contributions cap, that is, if you choose not to withdraw your excess concessional contributions. Exceeding your concessional cap can mean paying higher tax, although you do have the option to withdraw excess contributions rather than pay penalty tax.
Tip: Check when your salary-sacrificed contributions are to be paid into your super fund because even though you may receive your salary in one financial year, the salary-sacrificed contributions may be paid at a later date, and in a different financial year, potentially causing you excess contributions issues, and potentially extra super tax, or extra income tax.
9. Your salary sacrifice agreement can only relate to future income
Any salary sacrifice arrangement that you agree to can only relate to future salary, not past earnings. You can salary sacrifice performance bonuses if the agreement regarding your salary sacrifice was entered into before you became entitled to your performance bonus.
Warning: Some employers use an external party to arrange salary sacrifice agreements and the external party charges a flat fee for every transaction. The costs can add up very quickly if your employer plans to make small super contributions on a regular basis.
10. Where do I go for more information on salary sacrificing?
The following information or advisory sources may help you:
- ATO website ato.gov.au/super
- Your super fund. Check out your super fund’s website for information, and the forms required for salary sacrificing. Many super funds now offer a limited advice service (intra-fund advice) on certain topics such as salary sacrificing and changing investment options.
- Your HR department/employer. If you work for a large employer it is likely they have salary sacrifice arrangements in place for other employees. If you work for a smaller employer, they may or may not have experience with salary sacrificing.
- Contact us here at AGS Financial Group. Our financial planners and accountants are ideally placed to help you make the most of the system and build your super for the future.
Published : 20 Oct 2017