Superannuation salary sacrifice
About the author:
- Author name:
- By Terri Bradford
- Job title:
- Head of Wealth Management
- Date posted:
- 25 January 2022, 4:50 PM
Salary sacrifice remains one of the most popular strategies employees use to increase their contributions to superannuation tax effectively.
The reduction in concessional contribution limits has reduced the effectiveness of salary sacrifice somewhat but, all things considered, it is still a great way to boost superannuation savings and save tax over the long term.
How superannuation salary sacrifice works
An arrangement is entered into between the employer and the employee, for the employee to forego future salary or wages in return for another benefit - that is, additional contributions to superannuation.
The amount sacrificed to super should be a similar amount the employee is foregoing in before-tax salary or wages so that their employment package is not dramatically changed.
Unlike other salary packaging arrangements, superannuation contributions made by an employer on behalf of an employee via an effective salary sacrifice arrangement will not be subject to Fringe Benefits Tax.
What are the rules?
To be effective, any salary sacrifice arrangement for superannuation must be in place before the employee is entitled to receive the benefits. That is, before the employee performs the work, and before annual leave or long service leave entitlements accrue.
This means the individual cannot sacrifice salary or wages already received; it must be future salary or wages.
How much can a person sacrifice to super?
There is no limit on how much or how little a person can sacrifice into superannuation – unless there are conditions in place under an existing industrial law, award or workplace agreement.
The arrangement is made between the employer and the employee and can be from 0% to 100% of the person's salary.
What can constrain the amount sacrificed to super, however, is the concessional contribution limits.
Concessional contribution limits
For the 2021/2022 financial year the concessional contribution cap is $27,500 pa per person.
Concessional contributions include employer Super Guarantee (SG) contributions and salary sacrificed contributions.
The SGC rate for the 2021/22 income year is 10%.
The employee is responsible for the amount they contribute to superannuation not the employer. The employer can claim a 100% tax deduction on ALL taxable contributions made by the employee, but it is the employee who will wear any excess penalty tax if the taxable contributions are over the limit of $27,500 per annum.
For this reason, it is important the employee understands how much SGC is being paid on their behalf by the employer before they make arrangements to sacrifice a particular amount to superannuation.
Why?
Excessive contributions above the $27,500 limit are included in the individual’s taxable income and assessed at their marginal tax rates. An additional interest charge is also applied from the start of the financial year in which the excessive contributions were made up to the date of assessment by the Australian Tax Office.
This could result in a significant charge.
Example – counting SGC
Mike's gross salary for 2021/22 financial year is $75,000 pa. His employer pays 10%, or $7,500, in SG contributions to Mike's super fund. Mike's concessional contribution limit is $27,500 pa. Therefore, Mike's salary sacrifice strategy for 2021/22 would be:
- Employer SG contributions $7,500.00
- Salary Sacrifice amount $20,000.00
Sacrificing more than this amount will result in Mike exceeding the concessional contribution limit and excess penalty tax will apply. Mike should also take into account any likely increase in his salary during the year.
If his salary increases so too will the employer's SG payment and again, Mike could exceed the limit. For this reason, it may be appropriate for Mike to leave a buffer when calculating how much he should sacrifice into super.
How much can you sacrifice?
| Gross income pa |
SGC pa (10%) |
Salary sacrifice pa |
| $60,000 |
$6,000 |
$21,500 |
$80,000
|
$8,000 |
$19,500 |
| $100,000 |
$10,000 |
$17,500 |
| $120,000 |
$12,000 |
$15,500 |
| $140,000 |
$14,000 |
$13,500 |
| $160,000 |
$16,000 |
$11,500 |
| $180,000 |
$18,000 |
$9,500 |
| $200,000 |
$20,000 |
$7,500 |
| $235,680 |
$23,568** |
$3,932 |
Source: Morgans
** SG maximum contribution base is $235,680 (21/22fy). Employers only obliged to pay SG up to this base regardless of salary.
Age Limits
Individuals over age 67 up to age 75 who can meet a work test can now make concessional or non-concessional contributions to superannuation. Additionally, employers are obliged to pay SGC to any eligible employee regardless of age (including those over age 75).
In summary
Salary sacrifice arrangements, when managed correctly, can be an effective method for building additional wealth for retirement.
It still remains a popular method used as part of a retirement planning strategy, despite the reduction in the concessional contribution limits.
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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.