Has your employer offered the ability to salary sacrifice super? Would you like salary sacrifice of super explained in detail so you actually understand whether it is the right choice for you?
This article will answer every question you want an answer for. By the end of the article, you will know whether you want to salary sacrifice super, and be ready to download and complete the forms to be sent back to your superannuation provider.
The Basics of Super
Superannuation is the government’s way of forcing us to save to fund our own retirement, rather than relying on the aged pension. It may be paternalistic and controlling, but few people would harness the power of compound interest from their 20’s without it.
Your employer is mandated to pay a 9.5% of your gross “ordinary time” income into your chosen superannuation fund, as long as you are over 18 years of age and earn at least $450 per month.
This includes part-time and casual employees but over time hours do not attract an employer superannuation contribution.
Those under 18 or domestic workers (nannies and housekeepers) need to work 30 hours a week before recieving employers super contributions.
Self employed workers are not mandated to pay superannuation contributions, but can make after tax contributions and then claim a tax deduction.
There is a vague plan to increase the mandatory superannuation contributions, which has already been delayed. We will find out in the budget in May whether the planned increase this year to 10% will actually occur.
Read more about superannuation here.
Concessional vs Non-Concessional Contributions
Superannuation paid by your employer is a concessional contribution. This means it is only taxed on entry to the superannuation fund, at a concessional 15% rate instead of your marginal rate.
There is a limit to how much you can contribute concessionally to superannuation. It is currently $25,000 per year, but increasing to $27,500 in July 2021. If you exceed this, you will need to pay the extra tax (which can be withdrawn from superannuation).
Those earning over $250,000 gross have to pay an extra 15% tax (division 293) on super contributions on pay over the threshold.
If you earn so much you breach the $25,000/$27.500 concessional limit due to employer contributions, there is nothing you can do about this. Just be warned the ATO will send you the extra bills. You can pay the extra tax out of your superannuation as long as you complete the paperwork in time.
Good news for those with a super balance under $500,000 if you have used less than the $25,000 in the previous concessional limit in the past 5 years, the unused cap can be carried forward to the current years. Those stepping up to a senior position for the first time or returning from extended parental leave will as a result be able to avoid the division 293 for a few more years.
Non-concessional contributions are those that you can make after tax. In the years leading up to retirement, people often start funnelling all savings into superannuation, due to the ability to take a tax free income from superannuation after preservation age and retirement.
There is a $100,000 non-concessional cap per year, increasing in July to $110,000. You are able to “bring forward” the next three years caps to contribute a lump sum if you meet eligibility criteria.
Are Salary Sacrifice Super Contributions Concessional?
Yes. You can make additional pre-tax (concessional) super contributions by salary sacrificing. These will be taxed at 15% if you are under the concessional cap. This is particularly beneficial for those:
- On higher tax rates (earning >$45000 gross)
- Whose employer rewards extra contributions by contributing more themselves
- Who have contributed less than the concessional cap of $25,000/ $27,500
- Those that have plans to purchase their first home and would like to take advantage of concessional taxation on their savings. Seem more detail on the first home super saver scheme.
For those that hit the concessional cap, it still may be advantageous to salary sacrifice super and pay your marginal rate tax (minus 15% already paid and excess contribution charge.
This is generally true if your employer contributes extra super when you salary sacrifice yourself (public health services do this). It’s worth phoning payroll, working out what the deal is and getting out your calculator to see if it’s in your favour to salary sacrifice.
Are Salary Sacrifice Super Contributions Reportable?
Salary sacrificed super contributions are “reportable super contributions”. These count towards your income for assessing:
- HECS/HELP repayment – Because you will have less taxable income, your automatically witheld HECS/HELP debt repayments will be lower (and incorrect). You will then be asked to repay the debt repayments. Speak to your salary sacrifice provider to work out how much you will owe, and organise for this to be automatically witheld.
- Super co-contribution
- Medicare levy surcharge
- Centrelink benefits
- Child support payments
- Concessional super caps
Who can salary sacrifice super
Any employee can salary sacrifice into super. Employers offer variable (or no) other salary sacrifice items. Self employed individuals will have to make personal contributions and tax deduct.
How much salary sacrifice into super
If you earn less than $289,473 gross annually, your mandatory employer contributions will be under the new non-concessional cap.
If you are nowhere near hitting the concessional cap, consider salary sacrificing some extra fortnightly. Ensure you consider the effect of salary sacrifice on HECS/HELP repayments and centrelink. Avoid over sacrificing and getting into financial strife.
If you are expecting to be within $5000 of the cap, you may wish to wait until May to assess how much you can contribute to max your cap. Then contribute up to max out your concessional cap if you can, and it suits your goals.
How to Salary Sacrifice Super
Your payroll will provide you with the foms you need and organise.
Can you salary sacrifice super to your spouse
You cannot use your spouse’s unused concessional super cap to reduce your taxable income as the breadwinner of a household.
You can, however split your contributions with your spouse which provides no immediate tax benefit but does result in more equal balances that could be advantageous down the track. Non-concessional contributions for your lower earning spouse can also attract a significant guaranteed return.
When to Start Salary Sacrifice Super
It is always tempting to delay retirement savings, particularly when you are expecting a big jump in salary.
But it’s easier the earlier you start. Earning 5% in post tax growth annually, it would take $644 per month for 10 years to hit $100,000 in retirement savings.
If you start 20 years out from retirement (perhaps the most expensive phase of your life with a big mortgage and small children) it will cost $243/month to hit your goal.
Were you to start early, 35 years before retirement, it will cost only $88 / month.
If you start later (particularly as a specialist doctor), your mandatory super contributions may already breach the concessional super cap. By contributing earlier in your career, you can take advantage of more years of tax reduced contributions.
It doesnt matter if its such a small amount it doesnt seem worth it. Start with something, increase a little with each pay rise. Your future self will be thrilled!
Disadvantages of Sacrificing into Super
There are two major issues that put young people contributing to superannuation, and they are valid and important concerns.
Once your cash is in your superannuation, you cannot access it (excluding the first home savers scheme and severe hardship). If you need a new car, your super is no use to you.
Honestly, I see this as a positive, we all need a little help with will power sometimes!
But should you wish to retire before your preservation age, you will need investments outside super to fund the gap. The government, like many in the world, are struggling to fund aged pensions for an ageing population.
They are very likely to increase our preservation ages prior to retirement. How much, is speculation. It can come as a rude shock for the goal posts to change 5-10 years prior to your planned retirement.
Most, as a result, will plan to have investments outside superannuation as well. But to neglect the incredible tax concessions within super would be short sighted.
- Legislative changes
As well as changes to preservation age, the government may make further legal changes to superannuation. Perhaps you won’t be able to withdraw your entire balance at preservation age and blow it on depreciating assets before relying on the aged pension.
Perhaps they will get greedy and decide to tax retirees. If labour’s attempt to remove franking credit refunds is anything to go by, taxing retirees seems like political suicide. It’s not impossible though.
Superannuation may become less generous over the years to come. But it has to be somewhat advantaged to encourage people to use it – and help the government get out of paying everyone aged pension.
Most expect super always to be tax advantaged, so you will likely always be better off with money inside super than outside. But you may want more in the older spouse’s super account to minimize future legislative risk.
Is salary sacrifice super worth it
If you earn more than $45,000 salary, salary sacrifice into superannuation is an easy win. Sacrifice what you can easily afford up to the cap, and take advantage of any employer match schemes associated.
There are other costs, depending on your employer that you can salary sacrifice in order to pay less tax. Check out the full article here.
What is your super strategy? Can you tolerate the legislative risk of having your money locked away until preservation age (whenever that will be)? Let us know your thoughts in the comment section below.
Aussie Doc Freedom is not a financial adviser and does need offer any advise. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.