Spotlight on salary sacrificing
Having enough in retirement is currently an important issue for many Australians, particularly given the slide in value of the sharemarket since the global financial crisis emerged last year.
One strategy to boost super savings, which has become very popular is salary sacrificing. This involves an arrangement between you and your employer where you agree to forego a nominated amount of your ‘before-tax’ salary to be placed into your super fund, instead of receiving your full salary as cash.
The amount of your before-tax contributions (or ‘salary sacrifice’ contributions) are generally only taxed in the super fund at up to 15%, instead of at your marginal tax rate. This concessional tax treatment makes salary sacrificing an attractive way to grow your retirement savings, particularly if you’re in a higher tax bracket. Plus, if you start early, it also lets you take advantage of compounding interest, where you earn interest on interest. By consistently adding more to your fund each year, your savings grow faster than if you were to contribute a lump sum just before retirement.
Recent budget changes to the contribution caps
It is very important that you’re aware of the recent changes in the superannuation rules so you don’t breach the new contribution caps. In this year’s Federal Budget, the concessional contribution caps were halved.
This means that from 1 July 2009, people under age 50 will only receive concessional tax treatment on employer contributions (including superannuation guarantee) and salary sacrifice contributions up to the new standard cap of $25,000 (indexed) each financial year, instead of the previous cap of $50,000 (indexed) per financial year. For people aged 50 and over, the transitional cap has been reduced from $100,000 to $50,000 each financial year (neither of which is indexed). The transitional cap will cease on 30 June 2012 when the concessional cap for those 50 and over will drop to the standard cap amount applicable at the time.
Contributions which count towards the concessional contributions cap include the total of all employer contributions (including superannuation guarantee), salary sacrifice contributions and any personal deductible contributions for the financial year.
If you currently have a salary sacrifice arrangement in place, you should contact us to review your level of salary sacrifice contributions during the 2009/10 financial year. This is particularly important if you are paid weekly or fortnightly, as some tax years have an additional pay period. You don’t want to pay additional tax because you accidentally exceeded your contributions cap during the year.
If you do make any concessional contributions above the cap, they will attract the normal contributions tax of up to 15% in the super fund, plus you will be personally liable for an additional tax of 31.5% on the amount of contributions above the cap.
Plus a further 31.5% tax on the contributions can be payable if the super fund does not have your TFN.
For some people who are closer to 50, these changes to the legislation may significantly reduce the amount of concessional contributions they can make leading up to their retirement. That’s why it’s important to start saving as early as possible for your retirement.
What about bonus payments?
There are certain requirements for making a legitimate salary sacrifice arrangement. For example, you cannot make a salary sacrifice arrangement for salary or wages that you have already earned. This means that bonus payments from your employer can only be salary sacrificed into your superannuation fund if there is an existing agreement in place with your employer. And it needs to be in place before you earn the entitlement for the bonus or the employer decides to provide a bonus.
Case study
Dave and Max both work at Acme Painting, earning $45,000 per year. Dave is keen to make sure he has enough in retirement, so he has entered into an effective salary sacrifice arrangement with his employer to sacrifice $10,000 of his future earnings into his super fund each year. Max hasn’t started to think about his retirement yet, so he doesn’t have any arrangements in place.
The calculations below show that with a $10,000 salary sacrifice into his superannuation fund, Dave is in a better overall net position than Max in that year. Dave’s $10,000 salary sacrifice contribution reduces his taxable income which means he will pay less tax than Max. He can also grow his superannuation savings more tax efficiently as his salary sacrifice contributions into his superannuation fund are only taxed at up to 15%.
Note: The above example is provided by way of illustration only and is based on the listed facts. The example should not be taken to contain an estimate of your taxation costs or take-home pay nor does it contain a recommendation of the amount that you should salary sacrifice into superannuation.
The amount of salary sacrifice contributions that you should make will be dependent on various factors. Please ask your financial planner for help.
Please contact us if you have any questions or would like more information or advice on your level of salary sacrifice contributions during the 2009/2010 financial year.
What you need to know
This article contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances. Although the information in this article was obtained from sources considered to be reliable, the information is not guaranteed to be accurate or complete. The information in this article is current as at June 2009 and may change over time.
