Expert Advice

Salary sacrifice to superannuation

B2B Editor1 September 2014

Salary sacrifice is where a portion of your income is paid to your superannuation fund rather than to yourself directly. Contributions made to superannuation through salary sacrificing are paid from your “before-tax dollars” and is a strategy that can be used to reduce your taxable income. Making regular contributions can be an effective way to reduce your income tax and boost your retirement savings for the future.

Tax on superannuation contributions is capped at 15%, which for some people is lower than their marginal tax rate. Using this strategy may also drop you into a lower tax bracket.

How does salary sacrifice work?

You need to speak with your employer to see whether they offer a salary sacrifice package for their employees. If they do, you can discuss how to direct some of your income in to your superannuation fund.

The table below illustrates the potential saving that can be achieved by directing a portion of your income into superannuation. We have assumed a marginal rate of 39% (including the Medicare levy) for illustrative purposes:

Over a 5 year period to retirement this may equate to a tax saving of $24,000 where contributions of $20,000 pa are directed to superannuation, rather salary (assuming tax rates remain unchanged).

Salary sacrificing into superannuation is often used in conjunction with a transition to retirement strategy for people aged over 55 who are yet to retire from the work force. This strategy can be an efficient way to increase superannuation balances close to retirement, whilst not lowering your take home pay – a professional financial adviser can illustrate how this could work for you based on your individual situation.

While salary sacrificing to superannuation is a great way to increase your retirement funds in a tax efficient manner, it may reduce your day to day cash flow. Funds placed into superannuation can only be accessed when you meet a condition of release (normally retirement from the workforce after reaching preservation age or attaining age 65). As such, you need to ensure the amount sacrificed is well within your financial capability.

General Advice Warning:

The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser.