One of the common phrases heard when discussing superannuation is the term salary ‘sacrificing’ or salary ‘packaging’. Salary sacrificing, as the name suggests, involves redirecting, or sacrificing, some of your pre-tax income into superannuation.
Many people have heard of salary sacrificing, some may even have an understanding of the benefits, yet few implement a salary sacrificing strategy until late into their working years.
The human brain is wired to seek out something that provides benefit now rather than something that benefits them in the future; therefore the concept of saving money for the future comes unnaturally (as I’m sure many people will have experienced when trying to save for something).
The government was aware of this when they created the Australian superannuation system, forcing people into saving by creating compulsory superannuation contributions. The government rewards people who contribute additional money into superannuation via salary sacrifice by providing them with a tax benefit. This is achieved by salary sacrificing being contributed to super pre-tax. The money is taken out of your salary before you pay tax on it at your marginal tax rate and contributed to super instead, where it is taxed at the superannuation tax rate of 15%. For most people this will be lower than their marginal tax rate. This can be a tax-effective strategy and usually suits middle to higher income earners.
Salary Packaging Case Study
Jenny is looking to start her retirement savings
Jenny is 42 and decides she needs to start building her retirement savings. Jenny currently earns $60,000 per annum. She decides to begin salary sacrificing $1,500 per annum. As this money is taken out of Jenny’s salary before tax and contributed to superannuation she is taxed at 15% on the contribution, resulting in tax payable of $225.00. If Jenny were to have received this income in ’hand’ she would be paying 32.5% tax based on her marginal tax rate, with tax payable of $487.50.
By salary sacrificing $1,500 per year Jenny is receiving tax savings of $262.50 per annum.
There are additional benefits of salary sacrificing to consider:
- Contributions to super are locked away until you meet a superannuation condition of release (eg. you are over 60 and retired). Therefore the contributions are a forced way to save for your retirement.
- Once the money is contributed to super, the funds are invested. The earnings on these investments are taxed at a maximum of 15%, providing a low tax investment environment.
Salary sacrifice contributions form part of the concessional contribution cap (which also includes employer contributions), so when implementing a salary sacrifice strategy you need to make sure you don’t breach the concessional contribution cap as this may result in tax consequences.
The current concessional contribution limit* is:
- $35,000 for people aged 49+
- $30,000 for people under age 49.
As with anything, care needs to be taken in assessing your personal situation to determine if a salary sacrifice strategy is appropriate for you. If you would like more information on whether the salary sacrificing strategy is a suitable option for you, please contact us to arrange a complimentary initial consultation. At Blueprint Wealth, we offer financial advice that is right for you, no matter what stage of life you are at. Contact us to set up a plan that is right for you.
Casey Shaw is an Authorised representative and credit representative of AMP Financial Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee. Blueprint Planning Pty Limited (ABN 78 097 264 554), trading as Blueprint Wealth; Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based on this information.