SUPER STRATEGIES: SACRIFICE PRE-TAX SALARY INTO SUPER
Contributing some of your pre-tax salary, wages or a bonus into super could help you to reduce your tax and invest more for your retirement.
HOW DOES THE STRATEGY WORK?
With this strategy, known as salary sacrifice, you need to arrange for your employer to contribute some of your pre‑tax salary, wages or bonus directly into your super fund. The amount you contribute will generally be taxed at the concessional rate of 15%¹, not your marginal rate which could be up to 47%².Depending on your circumstances, this strategy could reduce the tax you pay on your salary, wages or bonus by up to 32%. Also, by paying less tax, you can make a larger after-tax investment for your retirement, as the case study on the opposite page illustrates.
WHAT INCOME CAN BE SALARY SACRIFICED?
- You can only sacrifice income that relates to future employment and entitlements that have not been accrued.
- With salary and wages, the arrangement needs to be in place before you perform the work that entitles you to the salary or wages.
- With a bonus, the arrangement needs to be made before the bonus entitlement is determined
- The arrangement, which should be documented and signed by you and your employer, should include details such as the amount to be sacrificed into super and the frequency of the contributions.
OTHER KEY CONSIDERATIONS
- Salary sacrifice contributions count towards the ‘concessional contribution’ cap (which is $25,000 in the 2017/18 financial year) and tax penalties apply if you exceed the cap.
- You can’t access super until you meet a ‘condition of release’. For more information, please visit the ATO website at www.ato.gov.au
- Salary sacrificing may reduce other benefits such as leave loading, holiday pay and Superannuation Guarantee contributions.
- Another way you may be able to grow your super tax-effectively is to make personal deductible contributions (see opposite page).
- From 1 July 2018, if certain eligibility criteria are met, you may be able to carry forward unused concessional cap amounts. This may enable you to make concessional contributions in excess of the annual cap in a future year.
William, aged 45, was recently promoted and has received a pay rise of $5,000, bringing his total salary to $100,000 pa. He’s paid off most of his mortgage, plans to retire in 20 years and wants to use his pay rise to boost his retirement savings. After speaking to a financial adviser, he decides to sacrifice the extra $5,000 into super each year. By using this strategy, he’ll save on tax and get to invest an extra $1,200 each year, when compared to receiving the $5,000 as after-tax salary and investing outside super.
PERSONAL DEDUCTIBLE CONTRIBUTIONS
1 July 2017, most people will be able to claim a tax deduction for personal super contributions, regardless of their employment status. Like salary sacrifice, this strategy may enable you to boost your super tax-effectively. There are, however, a range of issues you should consider before deciding to use this strategy. Your financial adviser can help you determine whether you should consider making personal deductible contributions instead of (or in addition to) salary sacrifice. You may also want to ask your financial adviser for a copy of our super strategy card, called ‘Make tax-deductible super contributions’.
(1) Individuals with income above $250,000 in 2017/18 will pay an additional 15% tax on salary sacrifice and other concessional super contributions within the cap.(2) Includes Medicare levy
Important information and disclaimer. This publication has been prepared by GWM Adviser Services Limited (ABN 96 002 071 749, AFSL 230692) (‘GWMAS’), a member of the National Australia Bank group of companies (‘NAB Group’), 105–153 Miller Street,North Sydney 2060. Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information. Information in this publication is accurate as at 1 March 2018. While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way. Opinions constitute our judgement at the time of issue and are subject to change. Neither GWMAS nor any member of the NAB Group, nor their employees or directors give any warranty of accuracy, accept any responsibility for errors or omissions in this document. The case study in this publication is for illustration purposes only. Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent