How Does Salary Sacrifice Work?
As its name implies, you simply sacrifice some of your pre-tax salary, therefore reducing your taxable income. Subsequently, this reduces the overall amount of income tax you are obliged to pay, providing you with more money to spend, save or invest. Salary sacrifice can be one of the most tax-effective ways to grow your superannuation. This type of strategy has many advantages:
Firstly: you only pay 15% contributions tax on the amount that goes into your super, instead of your marginal rate on the amount you take home.
Secondly: your taxable salary is reduced by the amount you sacrifice. Not only do you end up paying less in tax, depending on your salary and the amount you choose to sacrifice, you could even drop down a tax bracket.
And finally: once your money is in the super environment, all earnings are taxed at the concessional rate, up to just 15%, compared to any investments outside super that attract tax at your marginal rate.
How Much Can I Salary Sacrifice?
To prevent high income earners using salary sacrificing as a way of avoiding lots of tax, there is a limit on the amount you can contribute each year. These superannuation contribution limits are known as concessional contributions caps. Here are the guidelines for the 2016/17 financial year:
• You can salary sacrifice up to the annual limit for pre-tax contributions to superannuation
• The annual limit includes the 9.5% compulsory super contribution paid by your employer
• The maximum concessional contributions cap is $30,000 if under the age of 49
• If you are aged 49 or over on 30 June immediately prior to financial year, the maximum pre-tax contribution is up to $35,000
• Any amount above the maximum pre-tax contribution will be subject to the normal tax rate of 45% plus the Medicare Levy, not the concessional 15% rate
Federal Budget 2016 Announcement
The concessional contributions cap is proposed to be reduced to $25,000 from 1 July 2017. It is also proposed that individuals with balances of $500,000 or less will be able to carry-forward any unused concessional contributions cap for up to 5 years from 1 July 2017.
Example
Lucy earns $100,000 a year and is considering entering into an effective salary sacrifice arrangement. Lucy will sacrifice $15,000 from her pre-tax salary to her superannuation account. The following table illustrates how salary sacrificing works. All figures are rounded up to the nearest dollar.
By Salary Sacrificing:
• Lucy’s taxable income is significantly reduced
• Effectively, her net disposable income is increased by $5,850
In conclusion, salary packaging is a tax effective way for you to receive your salary as a combination of cash and benefits. Because the benefits are purchased with pre-tax dollars, you will only pay income tax on your reduced salary, thus reducing your personal tax liability.
