Super strategies – Sacrifice pre-tax salary into super

Contributing some of your pre-tax salary, wages or a bonus into super could help you to reduce your tax and invest more for your retirement.

 

How does the strategy work?

Other key considerations
With this strategy, known as salary sacrifice, you need to arrange for your employer to contribute some of your pre‑tax salary, wages or bonus directly into your super fund.

The amount you contribute will generally be taxed at the concessional rate of 15%¹, not your marginal rate which could be up to 47%².

Depending on your circumstances, this strategy could reduce the tax you pay on your salary, wages or bonus by up to 32%.

Also, by paying less tax, you can make a larger after-tax investment for your retirement, as the case study on the opposite page illustrates.
  • Salary sacrifice contributions count towards the ‘concessional contribution’ cap (which is $25,000 in 2020/21 and increasing to $27,500 from 1 July 21) and tax penalties apply if you exceed the cap.
  • You can’t access super until you meet certain conditions.
  • Salary sacrificing may reduce other benefits such as leave loading, holiday pay and Superannuation Guarantee contributions.
  • Another way you may be able to grow your super tax-effectively is to make personal deductible contributions (see opposite page).
  • If you did not use up your concessional contribution cap in 2018/19 or 2019/20 and meet certain conditions, you may be eligible to carry forward the unused cap amount. This could enable you to make concessional contributions exceeding the annual cap in 2020/21 or a future financial year³.

 

Case study

William, aged 45, was recently promoted and
has received a pay rise of $5,000, bringing his
total salary to $100,000 pa.

He’s paid off most of his mortgage, plans to
retire in 20 years and wants to use his pay
rise to boost his retirement savings.
After speaking to a financial adviser, he
decides to sacrifice the extra $5,000 into
super each year.

By using this strategy, he’ll save on tax and
get to invest an extra $1,200 each year, when
compared to receiving the $5,000 as after-tax
salary and investing outside super.

 

Personal deductible contributions

You may be eligible to claim a tax deduction for personal super contributions, regardless of your employment status.

Like salary sacrifice, this strategy may enable you to boost your super tax-effectively. There are, however, a range of issues you should consider before deciding to use this strategy.

It is also important to note that Super Guarantee (employer) contributions count towards the yearly cap and its equally important to know if you exceed this cap the ATO will charge a tax penalty.

 

Seek advice

Your Pinnacle Adviser can help you determine whether salary sacrifice suits your needs and circumstances.

 

¹ Individuals with income above $250,000 in 2020/21 will pay an additional 15% tax on salary sacrifice and other concessional super contributions within the cap.
² Includes Medicare Levy.
³ Unused cap amounts can be carried forward for up to five years. Other conditions apply. To find out more visit ato.gov.au.

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