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Super boost: How to get the most out of salary sacrificing
Arranging to salary sacrifice super contributions might sound like taking a
voluntary pay cut, but don't let the name fool you. Salary sacrificing can be a
tax-effective way to make your income go further, and it can also be a great
option for boosting your super.
How does salary sacrificing work?
Salary sacrificing (or salary packaging) is an arrangement you make with your employer
to withhold a portion of your pre-tax salary. In exchange, you get another type of
benefit — for example, a car or a computer — which is paid for out of your pre-tax
salary.
With a salary sacrificed super contribution, your employer agrees to pay part of your
salary straight into your super account. This is on top of the compulsory Superannuation
Guarantee (SG) contributions your employer makes, which are currently 9.25% of your
pre-tax salary.
Even if your retirement is still a long way off, paying a little extra into your super now
can make a big difference in retirement
Why salary sacrifice?
Of course, everyone likes to get more for their money while paying less tax, and salary
sacrificing can help you do that.
Salary sacrificing super contributions can allow you to take advantage of tax benefits
while helping to boost your super balance because they come out of your pre-tax
earnings and are not counted as assessable income for taxation purposes, which means
you could pay less income tax each year.
What’s more, if you make super contributions through a salary sacrificing arrangement,
they’re taxed in the super fund at a maximum rate of 15%. Generally, this tax rate is
less than what you would pay if you did not enter into a salary sacrifice arrangement. 1
This means salary sacrificing can be an especially useful strategy if you’re in a higher tax
bracket. Just say your income is taxed at 46.5% (including the 1.5% Medicare Levy).
You could save 31.5% in tax on the amount you put into your super via salary sacrifice,
rather than by topping up your super from your after-tax earnings.
How much super will I need?
You may think that it’s enough that your employer contributes to your super — but in
reality, these payments are unlikely to provide a comfortable lifestyle in retirement.
According to the Association of Superannuation Funds of Australia (ASFA) Retirement
Standard, a single person will need about $430,000 in today’s dollars for a comfortable
retirement, while a couple will need $510,000.2 Even with compulsory SG contributions
set to rise to 12% by 2019, the unfortunate reality is that many Australians will come up
short.
If you end up in this situation, you may have to keep working longer than you’d planned
or adjust to a more frugal lifestyle.
Paying a little bit extra into your super now by salary sacrificing super contributions
means that your salary sacrificed contributions increase your super balance, helping to
fund your retirement. And chances are, it will probably only make a small difference to
your take-home pay.
Case study
Julia is 40 years old and single. She is currently working full time and earns $60,000 a
year. Over the years, she has had a couple of career breaks and now her super balance
is $50,000.
If Julia relies on compulsory employer SG contributions alone, by the time she turns 65
she’ll have around $401,000 in her super account. But with a weekly pre-tax salary
sacrifice of $50, she could end up with an extra $100,000 by the time she turns 65. 3
How do I get started?
Ask your employer whether they offer the option to sacrifice part of your salary into
super. If they do, it’s usually just a matter of filling in a form. It can also be a good idea
to speak to a professional financial adviser to find out whether salary sacrificing is best
for your situation and retirement goals.
1
2
3
The concessional tax treatment is limited to a set amount of contributions made each income year.
AFSA (2013) Retirement Standard, p4. http://www.superannuation.asn.au/resources/retirement-standard
See calculation assumptions at http://findyourfuturecalculator.com.au/cfs/calculator.