Salary sacrificing into super is a very tax-effective form of building wealth towards retirement.
Not only does salary sacrificing reduce personal income tax, but it also results in concessional tax treatment on investment earnings.
Let’s take a look at some of the advantages associated with a salary sacrifice arrangement.
Benefits of Salary Sacrificing into Super
Salary sacrificing is an arrangement with your employer whereby you choose to reduce your wage in exchange for equivalent increased employer super contributions.
The main benefit of this is that you have a lower salary and therefore have a lower assessable income for tax purposes, yet still receive the same overall remuneration.
A secondary advantage of salary sacrificing is that you are building the amount of wealth held inside superannuation. When you contribute to super, your contributions are invested and the earnings derived from the investments are concessionally-taxed at a maximum tax rate of 15%.
How Much Difference Does Salary Sacrificing Make?
The compounded tax benefits of increasing super contributions via salary sacrificing can significantly boost your retirement wealth.
The table below shows the net tax benefit of salary sacrificing in one single year, based on a wage of $70,000 and after taking into account contributions tax.
|2022/23 FY||Standard (no salary sacrifice)||Maximum Salary Sacrifice|
|Tax On Income||$14,617||$7,413|
|Salary Sacrifice Contributions Tax||$0||$3,023|
|Total Tax Payable||$14,617||$10,436|
|Benefit Of Salary Sacrificing||$4,181|
This is the overall amount in tax saved every year, which can be invested – compounding investment earnings and future tax concessions.
Is Salary Sacrificing a Tax-Free Benefit?
Salary sacrificing is not a tax-free benefit. Although the amount you decide to salary sacrifice will not be assessed for personal income tax purposes; it will incur superannuation contributions tax.
The general contributions tax rate is 15%, but can be higher for very high income earners.
Disadvantages of Salary Sacrifice
There are a few risks and disadvantages associated with salary sacrificing, including but not limited to:
- Salary sacrifice contributions are classified as concessional contributions and therefore incur contributions tax of 15%
- Any amount contributed to super is inaccessible in full until you satisfy a superannuation condition of release, such as retirement or age 65
- Any amount contributed to super will usually be automatically invested and therefore exposed to market volatility and capital fluctuations
- The amount you can salary sacrifice is limited by the concessional contribution cap
How Does Salary Sacrifice Work?
To put in place a salary sacrifice arrangement, you will need to discuss with your employer or payroll officer whether this is something they will accommodate. Most employers will.
Generally, your employer will direct your salary sacrifice amount into your super account each pay period, together with the mandatory superannuation guarantee (SG) payments.
How Much Can I Salary Sacrifice?
The amount you are able to salary sacrifice into super is determined by the concessional contribution cap, your SG contributions and your ability to utilise any carried-forward, unused concessional contributions.
The concessional contribution cap for the 2022/23 financial year is $27,500 per person, per financial year. The types of contributions that count towards this cap include employer SG contributions, salary sacrifice contributions, personal concessional contributions and any super-owned insurance policy premiums paid directly from your bank account (not from your super balance).
Most employees will not have any personal concessional contributions or super-owned insurance policies, but these things should be included in the calculation in case you do.
Therefore, for most of you, to figure out how much you can salary sacrifice, you will simply deduct your employer SG contributions from the concessional contribution cap and the difference is the amount you can salary sacrifice.
For example, if your salary is $100,000 per year and your employer pays the standard 10.5% SG rate, you will be receiving SG contributions of $10,500 per year. This means you can salary sacrifice $17,000 ($27,500 – $10,500) into super for the year.
However, if you have a super balance below $500,000, you may be able to utilise any carried-forward, unused contributions from previous years.
Read more: Maximum Salary Sacrifice
What Happens If I Salary Sacrifice Too Much?
There is no penalty for exceeding the concessional contribution cap. If you do exceed the cap, the excess amount above the cap will be assessed and taxed at your personal tax rate, minus the contributions tax already paid.
The Australian Tax Office (ATO) will issue you with a letter stating that you have exceeded the cap and you will have the option to either withdraw the excess or leave it within super. If you leave it within super, it will count towards your non-concessional contribution cap. This is important to note, because if this causes you to exceed the non-concessional contribution cap, the excess non-concessional contribution amount will be taxed at 47% (including Medicare Levy).
Salary Sacrifice Calculator
The salary sacrifice calculator below allows you to see how much you are able to salary sacrifice without exceeding the general concessional contribution cap, based on your salary and the standard SG rate of 10%.
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