What is salary sacrifice?
Salary sacrifice is when you forego taking a portion of your income and instead paying salary sacrifice amount into superannuation. Personally we prefer the tax savings and invest in our best investment ideas or just passive index funds.
Key benefits of salary sacrifice include:
All salary and wages income are taxed at the individuals marginal tax rate below:
2016 – 2017 individual income tax rates
| Taxable income | Tax on this income |
|---|---|
| 0 – $18,200 | Nil |
| $18,201 – $37,000 | 19c for each $1 over $18,200 |
| $37,001 – $87,000 | $3,572 plus 32.5c for each $1 over $37,000 |
| $87,001 – $180,000 | $19,822 plus 37c for each $1 over $87,000 |
| $180,001 and over | $54,232 plus 45c for each $1 over $180,000 |
As the individual tax rate is a progressive system where the rate increases as income increase. The tax on Superannuation contributions is a flat rate of 15%. The key advantage of salary sacrifice is most people would pay a lower taxes by paying your salary into your superannuation on top of the super guarantee % as part of the salary package.
Therefore from above, you can save on taxes from salary sacrifice verses taking the income directly if you make more than $18,201 a year. Whilst it is not realistic for you to take all your income as salary sacrifice as there is a cap on total amount allowed in one year, in the long run every bit helps. Any amount funneled through this route will not be counted as declared income by the ATO.
This method of saving is especially effective if you are a high income earner where for example you are make more than $87,001 a year. Instead of paying 37% marginal tax rate or even 45%, you only have to pay 15%. Almost half or a third of the usual tax rates.
Since the money saved are in a invested in super funds, you would also benefit from the long term compounding of the savings (see how much you need to retire).
Salary Sacrifice Limits – What is a concessional contribution cap?
Obviously the government introduced this mechanism as a means of encouraging savings. But with any benefits it is bound for a few to push it to the limit. Hence the tax office introduced salary sacrifice caps which limit total amount anyone can save in one year.
The cap levels are quite fair as everyone has a concessional contribution cap. This means that total amount you contribute to the super all inclusive of salary sacrifice and the super guarantee amount included in your salary that are taxed at 15%. The concessional contribution cap in 2017 is $30,000 if you under 49 years old. If your over 49, the cap is $35,000. Contributions above this amount will attract additional tax at your marginal rate. From 2018 onward there is also greater flexibility under the Catch Up Concessional Superannuation Contributions rule where the unused cap is carried forward for 5 years.
For high income earnings when you have an income and accessible concessional super contribution of more than $250,000 a year there is also a Division 293 tax. The goal is to reduce the tax benefit of the super contribution where an additional 15% is taxed on top the flat rate. However even after the additional tax, there are still tax benefits, just not as much.
How do I make salary sacrifice?
Once the decision has been made just contact your employer and there should be preset forms and arrangements. One thing you should note that your employer payment of super does not have to be as regular as salary payments. If your salary is typically paid monthly, employers are allowed to pay superannuation contributions quarterly.
Additional benefits of Salary Packaging
Salary Packaging is a slight variation of above. This is when the employee and employer comes to pre arranged salary package where you can make some payments for items straight from pre tax income namely computers (excluding tablets and software etc), cars, health insurance school fees and childcare. Usually fringe benefit tax is payable with a limit of $2,000 but the limit for non profits are higher depending on the organization.