Salary sacrifice What is salary sacriﬁce? Tax efﬁciencies now Salary sacriﬁce is an arrangement between an employer and By salary sacriﬁcing into super, you may be able to beneﬁt an employee whereby the employee with the prior approval of from an immediate tax saving depending on your marginal the employer sacriﬁces some of their future salary in exchange tax rate. By salary sacriﬁcing into super, your contributions are for an equal amount of super contribution. This is all done on taxed at 15%, as opposed to your marginal rate of tax (which a “pre-tax” basis. would apply if you took the salary as income). The types of investments that you can invest in via super are Your contribution (less contributions tax) is then invested generally no different to the investments available outside of in super and compounds over time, meaning that you are super; however there are certain restrictions placed on super likely to end up with a higher end beneﬁt than if you hadn’t fund investments. Super is merely a tax and trust structure contributed. Of course you need to take into consideration if that surrounds your investment and affects the accessibility of you will need to pay more tax if and when you are eligible to your money and the tax that is paid on it. take some money out of super. Why salary sacriﬁce? Because of this, for individuals on marginal tax rates above 15%, salary sacriﬁce may result in signiﬁcant up front tax There are two main reasons that might prompt you to savings. consider thinking about diverting some of your pre-tax salary directly into your super fund. Tax efﬁciencies while your money is Firstly, to help grow your retirement savings. Super is in super the cornerstone of retirement savings for the majority of Unlike investments held outside of super, you do not have Australians. Most people recognise that with an aging to declare the earnings of your super fund in your personal population there is increasing pressure on us to fund for our income tax return each year. own retirement. In addition, the power of compound interest can mean that over time, regular savings into super could Your super fund reports investment earnings on your super have a major impact on your retirement beneﬁt. account and is taxed internally at a maximum of 15% on income, and effectively 10% on capital gains (as only two- Secondly, by diverting income from your pre-tax salary into thirds of capital gains are taxed if the investment is held in super, you could reduce the amount of tax that you pay, the fund for more than 12 months). This generally compares and at the same time you are investing in a tax-effective favourably to the tax that would apply to your investments environment. However, you need to keep in mind that any outside of super. amounts which you salary sacriﬁce into super are generally not accessible to you until you retire – they are essentially “locked away” until retirement. It is strongly recommended that you seek advice from a licensed, or appropriately authorised, ﬁnancial adviser before making any decision to salary sacriﬁce. Salary sacriﬁce Tax efﬁciencies at retirement A licensed ﬁnancial adviser can help you Current rules There are a lot of things to consider when making a decision What does it mean when you want to access your super about salary sacriﬁcing into super. savings upon retirement? It’s important to understand that in some cases, it may not be There are three ways in which you can access your super the most appropriate strategy for you – remember, all money beneﬁts once they become payable: invested in super is effectively ‘locked away’ (or preserved), n take a lump sum, generally until retirement age. n take a pension, or n a combination of both. In addition, the Government has put some limitations on how much you can contribute to super and under current rules Under current rules both lump sums and pension income are these limits depend on your age. You can see these limits by taxable, but in the 2006/2007 Federal Budget the Government clicking on ‘Super’ under ‘Library’ of the Mercer Super Trust proposed that all super beneﬁts paid from a taxed super fund website. to those over age 60 will be tax free, making super even more tax-effective in retirement. These new rules are expected to A ﬁnancial adviser will take into account your short, medium take effect from 1 July 2007. For those under age 60 the and long term ﬁnancial goals and your lifestyle needs before existing rules are expected to continue to apply. recommending appropriate strategies for you. Super may be only one part of these strategies. If you are over 55 years of age and can access your super, then under the current rules there is a tax-free threshold For more information, contact Mercer Wealth Solutions on that applies, and this tax free threshold is indexed each year. 1800 633 403. It is strongly suggested that you seek ﬁnancial advice prior to taking any lump sum, particularly if you are subject to Let’s recap Reasonable Beneﬁt Limits – although as part of the Budget proposals the Government has announced that Reasonable So, to summarise: Beneﬁt Limits will be abolished from 1 July 2007. Firstly, salary sacriﬁce is a term used for saving more into For more detail about tax free thresholds or Reasonable super by contributing from your pre-tax salary. Beneﬁt Limits, click on ‘Super’ under ‘Library’ of the Mercer Secondly, super continues to be a tax-effective way for most Super Trust website (www.mercersupertrust.com). people to save for retirement and can provide tax-effective When it comes to drawing income by way of a pension income in retirement. in retirement, super can again be seen as a tax-effective Finally, salary sacriﬁce isn’t suitable for everyone and you investment. should seek professional ﬁnancial planning and tax advice Under current rules part of the income you receive may not be before making any changes to your salary package. taxable. This is based on amounts in your super fund that you may have contributed from after-tax dollars. In addition, you may receive a tax-offset of 15% of the taxable income that you receive. This means that you can generate a substantial income each year before you have to pay any tax. Better still, no tax is paid by pension funds on their investment earnings. To speak directly with a Mercer If you are a Mercer Super Trust ﬁnancial adviser call 1800 633 403. member call 1800 682 525. www.mercerwealthsolutions.com.au www.mercersupertrust.com Adelaide Brisbane Geelong Glen Waverley Melbourne Morwell Newcastle Parramatta Perth Sydney The information in this fact sheet has been prepared by Mercer Human Resource Consulting Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into 09/06_5061 account your personal objectives, ﬁnancial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, ﬁnancial situation and needs. You should consult a licensed or appropriately authorised ﬁnancial planner before making any investment decision.