One of the most tax-efficient ways to create wealth for retirement is to make salary sacrifice contributions to a superannuation fund.
Sacrificing a portion of one’s pay leads, not only in a lower personal income tax liability, but also in a more favourable tax treatment of one’s investment returns. Let’s take a look at some of the benefits that come along with negotiating a wage reduction through a salary sacrifice plan.
Contributing Less to Your Annual Wage in Favor of Your Super Contribution
The arrangement known as “salary sacrifice” is one in which you and your employer come to an agreement wherein you opt to cut your compensation in exchange for equivalently enhanced employer contributions to superannuation.
The primary advantage of this arrangement is that you will have a lower salary and, as a consequence, a lower income that is subject to taxation; however, you will continue to receive the same overall remuneration.
You are able to increase the amount of wealth that is stored within your superannuation account, which is an additional benefit of salary sacrificing. When you make a contribution to a superannuation fund, that money is invested, and any returns that are generated from those investments are subject to concessional taxation with a maximum tax rate of 15%.
What Kind of a Difference Does Giving Up Some of Your Pay Make? If you increase your contributions to your superannuation fund through salary sacrifice, you may dramatically increase the amount of money you have saved for retirement. For more direction and guidance you can contact a superannuation advisor at Omura Wealth Adviser to get a professional recommendation on your specific case.
Is the Benefit of Salary Sacrificing Exempt from Taxes?
The act of sacrificing part of one’s salary does not result in a tax break. Despite the fact that the amount you choose to salary sacrifice will not be subject to personal income tax, the decision will still result in the payment of tax on contributions to superannuation. The standard tax rate on contributions is 15%; however, those with extremely high incomes may be subject to a higher rate. Understand your tax obligations properly by reach out to a superannuation advisor in Australia.
The Drawbacks of Giving Up Some of Your Salary
There are a number dangers and drawbacks involved with sacrificing a portion of one’s wage, including but not limited to the following:
Contributions made through salary sacrifice qualify as concessional contributions and are subject to a contributions tax of 15% because of this classification.
• You won’t be able to access the entire amount of any contribution you make to superannuation until you fulfil a superannuation condition of release, such as reaching retirement age or age 65.
• Any money put into a retirement account will typically be automatically invested, leaving it vulnerable to fluctuations in both market value and the value of the underlying assets.
The concessional contribution limitation places a restriction on the amount of your wage that can be sacrificed for tax purposes.
How does the salary reduction option work?
You will need to speak with your employer or the person in charge of your payroll about whether or not they will be able to accommodate a salary sacrifice agreement before you can put one into place. The vast majority of employers do.
You are required to advise your employer of the amount of money that you would want to sacrifice from your paycheck on a pay period basis, taking into consideration whether or not it is affordable for you to do so, the concessional contribution ceiling, and your individual tax rate. In most cases, your employer will deposit the amount of your salary sacrifice into your super account on a regular basis, concurrently with the payments that are required by law to be made into your account (known as the superannuation guarantee).
How Much of My Salary Am I Willing to Sacrifice?
Your capacity to utilise any carried-forward, unused concessional contributions also plays a role in determining how much of your pay you are able to sacrifice into your superannuation account in addition to the ceiling on concessional contributions and your superannuation guarantee contributions.
For the 2022–2023 fiscal year, the maximum amount of concessional contributions that can be made by an individual every fiscal year is set at $27,500. Employer superannuation guarantee payments, salary sacrifice contributions, personal concessional contributions, and any super-owned insurance policy premiums paid straight from your bank account are all examples of the sorts of contributions that contribute against this quota (not from your super balance).
Although the vast majority of employees will not have any personal concessional contributions or super-owned insurance policies, it is important to include these things in the calculation just in case they do.
As a result, in order to determine how much of your salary you are able to sacrifice, the majority of you will simply subtract the amount of your employer’s superannuation guarantee contributions from the concessional contribution cap, and the amount that remains is the amount that you are able to sacrifice from your salary.
For instance, if your annual income is $100,000 and your company pays the usual rate of 10.5% towards your superannuation, you will be eligible for superannuation guarantee payments of $10,500 per year. This indicates that you have the ability to contribute an additional $17,000 ($27,500 minus $10,500) into your superannuation account for the year. If, on the other hand, your superannuation balance is less than $500,000, you may be eligible to make use of any carried-forward contributions from earlier years that were not utilised.
What Are the Consequences of Making an Excessive Number of Salary Sacrifices?
When it comes to concessional contributions, going above the limit won’t cost you anything. If you do end up exceeding the limit, the amount that you contributed in excess of the limit will be subject to an assessment and taxation at your personal tax rate, less any contributions tax that has already been paid.
You will receive a notice from the Australian Tax Office (ATO) informing you that you have surpassed the cap, at which point you will have the choice to either take the extra money or leave it within the superannuation account. If you keep it in your superannuation account, it will count towards the maximum amount of non-concessional contributions you may make. It is essential that you keep this in mind because, if it leads to your exceeding the limit on non-concessional contributions, the amount that you contributed in excess of the limit will be subject to a tax of 47%. (including Medicare Levy).
Salary Sacrifice Calculator
Using the calculator that we provide, you will be able to determine how much of your salary can be sacrificed without going over the general concessional contribution cap. This is calculated using the amount of your salary as well as the standard superannuation guarantee rate, which is currently set at 10%. You can contact a financial advisor or superannuation advisor at Omura Wealth Adviser to get a professional recommendation on your specific case.
More to read: Understanding Super Concessional Contributions?