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