What is salary sacrificing? Salary sacrificing is also known as salary packaging or total remuneration packaging. You and your employer agree for you to receive less income before tax and in return your employer pays for certain benefits of similar value for you. This means you pay less tax on your income.
Salary sacrificing into super can be a great way to boost your retirement savings while reducing your taxable income. However, it's important to understand how salary sacrificing works and consider all the implications before making the decision to do it.
The risks and disadvantages associated with a salary sacrifice arrangement include lack of accessibility, fluctuations in savings and possible reduction in employer contributions. While these are the main disadvantages of salary sacrifice arrangements, other risks also exist.
The amount that is salary sacrificed is taxed in the superannuation fund at 15%. An employee on 30% marginal rate will save 15% tax on every dollar that is salary sacrificed into super. The employee on higher marginal tax rates will have higher savings.
Salary sacrifice is an arrangement with your employer to make additional superannuation contributions from your pre-tax salary each pay cycle. Your employer makes the payments on your behalf, and they are taxed at 15% instead of at your personal income tax rate.
An example of salary sacrificing
At the end of the financial year, Terry's gross income is $90,000 but because $6000 has been salary sacrificed, only $84,000 is counted as assessable income and taxed at his regular tax rate. The $6,000 he's salary sacrificed is taxed separately at the concessional tax rate of just 15%.
Your employer must pay at least 10.5% of your 'ordinary time earnings' into your super account. (This will increase to 11% from 1 July.) The minimum amount that your employer must pay into your superannuation fund. It is currently 10.5% of your gross salary.
Salary Sacrifice is from your pre-tax income. It's taxed at just 15% which is lower than your take-home pay, so you save straightaway. Contribute and Claim is a contribution that can be made any time, even in June. You then claim it in your next tax return as a deduction.
Salary sacrificing is sometimes called salary packaging. Under an effective salary sacrifice arrangement: the employee pays less income tax on their reduced salary or wages. you, as the employer, may have to pay fringe benefits tax (FBT) on the fringe benefits you provide.
There's no limit on how much you can salary sacrifice into super. However, it's important to consider your concessional contributions cap.
The vehicle becomes your liability.
In a salary sacrifice car scheme, the loan repayments and all other related expenses (e.g., admin fees) are your responsibility. It's not like a company vehicle you can return to your employer once you leave their service.
An effective salary sacrifice arrangement can't include salary and wages, leave entitlements, bonuses or commissions that you accrue before you enter an arrangement. Expenses paid with direct debits from your pay are not salary sacrificed.
Some disadvantages of salary packaging are:
Developing the list of items that can be salary packaged and communicating this to staff. Negotiation of the breakup of the salary package when an employee leaves, especially if there are wages or payments outstanding.
You and your employer agree for you to receive less income before tax and in return your employer pays for certain benefits of similar value for you. This means you pay less tax on your income. A salary sacrifice arrangement reduces your taxable income, meaning you may pay less tax on your income.
Benefits of salary sacrifice
You can pay less tax. These contributions are taxed at 15%, which is generally lower than the tax you'd pay if you received it as take-home pay. It can reduce your taxable income so you may pay less income tax.
The maximum which can be put toward Salary Packaging (as a net amount) for items such as rent or mortgage payments in NSW is $9,010. You are able to include 'usually tax deductable items' and voluntary super contributions over and above the Salary Packaging cap.
Why salary sacrifice? Salary sacrifice reduces your taxable income, so you pay less income tax. Only 15% tax is deducted from your salary sacrifice amount compared to the rate you pay on your income, which can be up to 47% (including the Medicare Levy).
If you make $35,000 a year living in Australia, you will be taxed $3,892. That means that your net pay will be $31,108 per year, or $2,592 per month. Your average tax rate is 11.1% and your marginal tax rate is 21.0%.
Your 'earnings' for Medicare Levy Surcharge and Rebate purposes increases as a result of salary packaging. As a result, you may be required to pay the Medicare Levy Surcharge (if you do not have private health cover) or your Rebate may be reduced.
Salary sacrifice is a contribution you make to your super from your before-tax pay. The contribution is deducted from your total salary before income tax has been calculated, and forwarded to your super account. Why salary sacrifice? Salary sacrifice reduces your taxable income, so you pay less income tax.
Assume, for example, you will need 65 per cent of your pre-retirement income, so if you earn $50,000 now, you might need $32,500 in retirement.
If you make $70,000 a year living in Australia, you will be taxed $14,617. That means that your net pay will be $55,383 per year, or $4,615 per month.
This obviously depends on what annual income you want to fund but if you want to be able to afford a comfortable retirement—which is an income of just over $48,000 a year for a single according to the ASFA Retirement Standard—then you need a balance of at least $500,000.