Plan ahead …. 6 tips and traps with salary sacrifice

Early in the financial year is the time to consider if you should  salary sacrifice to super, that means now.

salary sacrifice, concessional contributions, superannuation, super, retirement, concessional, SGC

Salary sacrifice, as the name suggests, is sacrificing receiving money in your personal bank account versus contributing it to super.

In most cases you will only pay 15% tax on the contribution however for those earning greater than $300,000 per annum this will increase to 30%.

Before making a decision to salary sacrifice we advise you to consult with your financial adviser or accountant to ensure that it will be of benefit for you. It shall not be of benefit to everybody.  You also need to ensure that you are contributing within your limits. If you are under 50 its $30,000 per year (from all sources in total so you need to calculate how much your employer is contributing and ensure that you do not exceed this limit). Penalties exist for going over your $30,000. The 2016 Federal Budget proposes to reduce the allowable super contributions for all Australians regardless of age to $25,000. At time of writing (August 2016) this was yet to be passed into law.

Here is an example, Little Johnny has grown up and is now funding for retirement. He earns $95,000 a year, only has one employed job and wants to increase his retirement nest egg. Little Johnny’s employer is paying the Superannuation Guarantee Contribution of 9.5%. That is $9,025 a year. Little Johnny is 45 so the most he can contribute is $30,000 to super. His employer has contributed $9,025 which leaves $20,975 for little Johnny to contribute from all sources.  If Little Johnny has no other income from anywhere else so his total taxable income is $95,000 then he stands to save between 22% and 17.5% tax or around $4345.63. That is holiday at the very least. He does have less take home pay though and he shall have to wait until he is 60 to get access to his money. As a sideline, if Little Johnny was aged 49 as at 30 June 2014 he would have been eligible to contribute up to $35,000 to super in total from all sources.

The traps of salary sacrifice….

1. Access to super when you are 60. Keep in mind that your money is locked away. Ensuring you have enough cash to fund for life expenses is your first consideration. Draw up a budget, give some serious thought to your expenses, start small and build up.

2. Your employer does not have not to pay you SGC on $95,000. Little Johnny has sacrificed $20,975 so your employer only has to pay you 9.5% on $74,025 (The difference between $95,000 and $20,975 you have decided to sacrifice). This is bad if they choose to do this as you end up with less super from your employer. You want to double check that they are still paying you the full amount and then make a decision from that point on. Get something in writing from your employer would be a good idea. Remember your employer is not required to pay SGC on the sacrificed amount so check this out before making a decision.

3. Be active with you money. Extra cash shall be going into super. Be active around how you want that invested. Do you want it invested into your existing portfolio, or pay to cash and then quarterly make an allocation to investments. Both options have their positives and negatives so once again talk to your adviser.

4. The SGC your employer is required to pay is going up. From the 2018/19 tax year it is going up to 10% then the following year to 10.50% and 0.50% each year until 2022/23 at 12%. It’s a few years away but you shall need to adjust your salary sacrifice when it comes around.

5. If your income goes up, guess what? That’s right your SGC goes up with it in most cases. Once again, you need to adjust your salary sacrifice.

6. As the heading says, get in early. If you are employed you need to talk to your payroll about salary sacrifice early in the tax year so you can let your employer know. Talk to your accountant or adviser to plan it out and then speak to payroll to get it sorted.

Please note that the information provided in this blog has been provided as general advice only. We have not considered your personal financial circumstances, needs or objectives. Most importantly, seek advice on salary sacrifice from a licensed professional financial adviser before making any decisions.