What is salary sacrificing for super?

Giving up a portion of your income to increase your superannuation could be a great way to save for your future. 

Salary sacrificing (also known as salary packaging) is an arrangement where an employee sacrifices part of their pre-tax income to contribute to their retirement savings.  
On the face of it, salary sacrificing might feel like you’re giving up part of your income, but there’s a lot to gain in the long run, and it could provide you with tax benefits too. 
If you’re starting in a new job, it’s a great time to consider whether salary sacrificing is something you’d like to do. The decision is entirely yours to make. Most employers offer the option to salary sacrifice, so it’s worth asking about it

Salary sacrifice and superannuation 

Salary sacrificing is a tax-effective way to contribute to your super fund, explains Yvonne Chu, Head of Technical Services at Australian Unity.  

“Basically, it means you enter into an agreement with your employer to forego part of your pre-tax salary or wage in return for the same amount of super contribution from the employer, who pays this into your super fund,” Yvonne says.  

For example, if you normally earn $100,000, and you enter into an agreement for your employer to contribute $10,000 of your income into your super fund, your take-home pay will be $90,000, less tax.  

As the tax for super contributions is lower than the marginal tax rate for most people, you’ll typically reduce your tax payments whilst saving for your future.  

“Employers are very likely to support salary sacrificing for super because there’s no detriment to them financially or tax-wise,” says Yvonne. “Over the long term, you’re going to end up with more in retirement savings. The sooner you start salary sacrificing, the better off you’re going to be in retirement.” 
If you’re on a low income, you may also be eligible for extra contributions from the government.    

What else can you salary sacrifice? 

Salary sacrificing goes beyond super. In fact, there aren’t restrictions on what can be salary sacrificed, so you could potentially buy laptops or phones, or even pay childcare fees via salary sacrifice.  

The benefit? Because you use your pre-tax salary, your overall salary is decreased, which may, in turn, reduce your tax bill. 

Your ability to salary sacrifice does depend on what your employer offers, though. According to the ATO, your employer will need to pay fringe benefits tax on any salary sacrificed items that aren’t part of your salary or super, such as cars, school fees and gym memberships. (Some work-related items may be exempt from fringe benefits tax, however, such as portable electronic devices, computer software, protective clothing or a briefcase.) As a result, many small businesses don’t offer salary sacrifice for these sorts of items. 

If you’re considering salary sacrificing for a car, gym membership or the like, make sure it works for your circumstances. For example, if you’re using salary sacrifice to purchase something you wouldn’t otherwise buy, it might be worth reconsidering. You still have to pay for it, after all.  

If you’re not sure, check out some of the salary sacrificing scenarios on the ATO website, or consider talking to a financial adviser or accountant. 

Setting up salary sacrificing

If you would like to salary sacrifice into your super, the best way to ensure that there’s no misunderstanding is to state in writing how much you’d like your employer to add to your super fund from your own earnings. An email is usually fine, although sometimes your employer will have a form for you to fill out.

At least every quarter, check your super account to make sure that the correct amount of super is being paid into your account. Checking this has never been easier as most funds allow you to access your account online.

How the salary sacrifice process works

As the ATO explains, the process for salary sacrificing looks something like this: 

  • Your employer pays you a reduced salary or wages. (This is your standard salary, less the amount you are contributing to your super). You pay income tax on the reduced salary amount only.
  • Your employer pays your salary sacrificed contribution into your super fund.
  • Your salary sacrificed contributions are taxed in the super fund. These are classified as employer super contributions, rather than employee contributions. 

It’s important to know that your salary sacrificed super contributions will be in addition to your employer’s compulsory super contributions. While employers could previously use salary sacrificed contributions to reduce the amount they paid under the super guarantee, this stopped on 1 January 2020.

Tax considerations

Salary sacrificed super payments, known as concessional contributions, are taxed at 15 percent. This is lower than the marginal tax rate for most people and means you end up in front in the long run, because you pay less tax while boosting your retirement savings at the same time. If you’re self-employed, concessional contributions are tax deductible. 

Bear in mind, however, there is a limit to how much extra you can contribute to your super at a reduced tax rate. The combined total of your employer and salary-sacrificed contributions cannot exceed $25,000 per financial year. If it does, you’ll pay the full tax rate on the amount over $25,000.

The upshot: should I salary sacrifice?

If you can afford to top up regular super contributions from your employer with some of your own earnings, it’s worth considering.

In most instances, making extra concessional contributions to your super is tax effective if you earn more than $37,000 per year.

Small but regular contributions add up over time, meaning your nest egg benefits from the wonders of compound interest over the years.

And, if you’re one of the many Australians able to access a portion of your super early due to financial distress caused by the COVID-19 pandemic, salary sacrificing can help rebuild your nest egg down the track once things return to normal.

That said, the value of salary sacrificing will depend on your personal financial situation and your retirement goals. If in doubt, seek advice from your accountant or financial advisor.

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