What is salary sacrifice?

Salary sacrificing to super occurs when you elect to have your employer invest an additional portion of your pre-tax salary into a super fund for you.

In addition to increasing the level of retirement savings you have, salary sacrificing to super is popular because it can also reduce your income tax. This is because the ‘sacrificed’ portion goes directly into super, meaning it is not subject to your normal income tax rate (which could be up to 46.5% including Medicare Levy), but at a maximum rate of 15%. This would result in a tax saving for most investors.

The following graph shows the benefits of salary sacrifice compared to other savings methods.

To set up a salary sacrifice arrangement, speak to your employer.

Who should salary sacrifice?

Whether salary sacrifice is worthwhile for you will depend on your own personal circumstances and income level. Putting money away towards your retirement can make a lot of financial sense, and salary sacrifice is a great way to save money on income tax for people who pay more than 15% income tax. Talk to your financial planner about whether salary sacrifice is right for you.

What are the limitations?

There is an annual concessional contributions limit of $25,000. Concessional contributions include compulsory super (SG), employer and salary sacrifice contributions. However, an annual limit of $50,000 will apply for people aged 50 or over until 1 July 2012. Amounts contributing in excess of these above limits will be taxed at 46.5% (15% contributions tax plus 31.5%) or more!
Once you put it into super it generally must remain there until you retire. This is referred to as ‘being preserved’.
Your employer may place a limit on the level of salary that can be sacrificed to super.
Your salary sacrificed contributions may count towards the 9% contribution that your employer must make under the superannuation guarantee. This means your salary sacrifice can reduce the amount your employer is required to make. A salary sacrifice contribution is officially classed as an ‘employer contribution’.
It is not compulsory for an employer to offer salary sacrifice.
Ask your adviser about the taxation implications when you eventually retire and access your superannuation.
For people earning $61,920 or less, making after-tax super contributions and accessing the Government Co-contribution scheme may be more beneficial.

Click here to learn about the Government Co-contribution and other incentives for contributing to super, or use the menu on the left to navigate through other super educational information.