SALARY SACRIFICING
What is a salary sacrifice to super?
It is a voluntary deduction from your pay to your superannuation. The deduction is taken out of your pay before income tax is calculated which is why it is called a pre-tax deduction. It means you pay less income tax as you are “sacrificing” some of your take home pay to put into your super for retirement. All contributions, including salary sacrifice or after tax contributions, are fully preserved (ie they can only be withdrawn from super once you have reached your preservation age and retired).
How does it work?
A percentage of your salary or a dollar amount can be deducted from your pre-tax salary. There is no minimum amount. You can start small and increase as your pay increases. You’ll need to find out from your employer whether salary sacrificing is available to you and if there are any conditions.
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Since sacrificed contributions are being deducted before your salary is taxed, the amount of income tax you pay is reduced and your take-home pay is actually higher (when compared to making the same level of contributions on an after tax basis). Contributions tax (currently 15%), is deducted from any sacrificed contributions. This means that if your taxable income is more than $34,000pa , the 15% contributions tax is generally lower than the tax you would pay if you received the money as income. If you wish to make a $5,200 contribution to superannuation ($100 per week), you may either do this from your after tax salary or before tax salary. The difference is illustrated below: After Tax Arrangement Annual Salary Salary Sacrifice Contribution $60,000 Nil Salary Sacrifice (pre-tax) Arrangement $60,000 -$6,118** Notes
** For a net $5,200 sacrifice contribution to the fund, a contribution of $6,118 must be sacrificed from your pre-tax salary to allow for the 15% superannuation contribution tax of $918. ie $5,200/(1-15%) = $6,118 , * Based on tax rates for FY 2008/09 including medicare levy. Tax rebates have been excluded.
Taxable Salary Tax Payable* Take-Home pay $5,200 after tax contribution Net Take-Home pay Net super contribution Total overall tax
(incl super contribution tax)
$60,000 $12,900 $47,100 -$5,200 $41,900 $5,200 $12,900
$53,882 $10,973 $42,909 Nil $42,909 $5,200 $11,891
Take home pay is $1,009 higher via salary sacrifice option. The same net superannuation contribution is achieved via either option Less overall tax is payable via salary sacrifice
Are there limits on what I can salary sacrifice?
Yes. Your employer contributions and salary sacrifice contributions combined are capped at $50,000 pa if you are under age 50 or $100,000 pa if you are 50 or over (the higher limit for over 50’s only applies until June 2012). Amounts above the cap can be taxed at the highest rate of 46.5%.
Does salary sacrifice work for everyone?
No, salary sacrificing may not be effective in all circumstances. For example there may be no tax advantage for you if your income is less than $34,000 pa.
Does Sacrificing affect my “salary” for other purposes, ie will I be disadvantaged?
No. Your gross “pre-salary-sacrifice” salary is used for the calculation of any insurance through the fund and contributions. However…Your lower “post salary sacrifice” salary is currently recognised by numerous Government agencies. This means you may also qualify for a Government co-contribution payment if you make after tax contributions as well, or increased family tax benefits etc. Please note however, that the May 2008 Federal Budget proposes to change this from 1 July 2009, so you only have a limited opportunity to qualify for these benefits through salary sacrifice. Your employer can also use your pre-salary-sacrifice salary for calculating company super contributions, any leave entitlements and bonuses etc. Lowering your taxable income may also enable you to qualify for various tax rebates.
Will the tax on my final benefit alter?
There are many strategies available to help you substantially reduce (or eliminate) the tax payable when you receive your benefits in retirement. These include Transition to Retirement Pensions and Allocated Pensions, but it does depend on your situation and whether you are over or under 60 years of age when you retire. MasterSuper’s Financial Planners can help you with these options to ensure that you set yourself for retirement.
Why put more money into super?
A small difference in contributions can make a big difference in the benefit you receive at retirement. When you consider that the average female, retiring at age 60, needs to plan on living for another 24 years in retirement and the average male 19 years, your super needs to keep your lifestyle going for a long time. Commonwealth Government estimates suggest that if you are starting work at age 30, superannuation contributions of 9% will end up providing only about 30% of your pre-retirement salary by the time you retire.
This example below shows how putting a little extra into your super on a regular basis can make a big difference when retirement arrives.
If you would like to start salary sacrificing, please contact your pay office today.
For more information on whether salary sacrificing to super would benefit you, please visit the Plan Ahead section of our website and use our salary sacrifice calculator. We also recommend you consider consulting a financial adviser before making any decisions.
Want to know more?
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Please contact us:
MasterSuper Helpline 1300 550 482 for general enquiries MasterSuper Financial Planning Helpline 1300 784 447 to speak to a qualified financial planner
Or visit our website at www.mastersuperfund.com
This flyer is intended to provide information of a general nature only and has been prepared by MasterSuper without taking account of your personal objectives, financial situation or needs. Before acting on this information you should carefully assess how appropriate the information is to your personal situation. You should also consider seeking personal financial advice from a qualified licensed adviser before Super Quick Tips series 5/08 making any financial decision.