Considerations before making the decision to Salary Sacrifice to Super
A question that comes up frequently is ‘should I salary sacrifice to super?’. As with everything else, this depends. There are a couple of considerations that need to be taken into account before this can be answered. And, as always, it will be different for everyone, based on their personal situation.
Salary sacrificing is where an amount is deducted from your gross wages and paid across to your super fund as a contribution. There are a few advantages to doing this. You may reduce the amount of tax you pay on your income, and you will be increasing your super balance by more than compulsory super guarantee amounts being added by your employer. Neither of these can be a bad thing. Who doesn’t want to save tax and ensure that when it comes to retirement, you won’t have to eat cat food for dinner? However, there are a couple of things you need to be aware of before making an arrangement with your employer:
- Your employer does not have an obligation to enter into a salary sacrificing arrangement with you. These are voluntary and if the employer sees it as too much trouble may decline your request.
- It is only really beneficial tax wise if you are paying tax at a marginal tax rate above 19%. Salary sacrifice contributions are taxed at 15% going into the fund (and if you earn above $300,000 per annum – 30%). If you are earning less than $37,000 per year, it doesn’t make sense to sacrifice as you could potentially end up paying more in tax in super. Once you are earning above this and your marginal tax rate increases to 32.5% it can be beneficial. If you are earning less than $37,000 it may be better for you to add to your super in after tax dollars as these contributions would not be subject to tax going in (non-concessional contributions).
- Any salary sacrifice arrangement will reduce your take home pay, so make sure your budget can handle this.
- Some sneaky employers will actually reduce the amount of Super Guarantee (‘SG’) they pay for you which effectively means a reduction in overall earnings. For example, say you had an annual salary of $75,000. The SG amount payable by your employer would be $7,125 per year. If you were to sacrifice $10,000 per year to super, your employer may decide to calculate the SG on this reduced annual salary of $65,000, which would give SG contributions of $6,175, effectively ripping you off $950 per year. (If you were to come across an employer like this it might be time to look for another job!).
- Once the cash is in super it is there until you meet a condition of release such as retirement. So if you are still a spritely spring chicken you may be waiting many years to see those funds again! However, by putting a little each week into super if you are in this category of chicken, imagine the nest egg you will have by the time you reach retirement. (That pun was so coincidental).
- Any other salary sacrifice contributions.
So before you contact your payroll department and arrange anything, it’s best to get advice from a financial planner on your options, and also your accountant for the tax consequences.
If you have any questions please contact our office on 07 4151 8898.
The Money Edge | Bundaberg
General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.