Salary sacrifice is an arrangement between you and your employer which enables you to transfer part of your before-tax income into your super account to take advantage of potential tax benefits.Salary sacrifice payments are paid before PAYG tax is deducted from your salary, whereas member contributions or personal contributions are paid from salary after PAYG tax has been deducted. Salary sacrifice contributions are therefore treated like employer contributions and a tax rate of 15% is applied (provide the fund has your tax file number). The contributions tax of 15% can be more beneficial to the various marginal tax rates of 30%, 40% and 45% that can apply to income.
This is the key to salary sacrifice. You divert part of your salary to super and only incur the 15% super contribution tax as opposed to the alternative of paying marginal tax rates on the amount you sacrifice. That means you are investing money into super with your before-tax money. If you are interested in this option to boost your super balance, you will need to check with your employer to determine whether you are able to have a salary sacrifice arrangement.
An example of how salary sacrifice can work. Let's look at Jane, who decides to salary sacrifice $10,000 from her $65,000 annual salary.
| Example with salary sacrifice | Example without salary sacrifice | |
| Gross Salary | $65,000 | $65,000 |
|---|---|---|
| Less salary sacrifice into super | $10,000* | $0 |
| Taxable salary | $55,000 | $65,000 |
| Income tax (PAYG) applicable (including the Medicare levy) | $11,175 | $14,325 |
| Net salary | $43,825 | $50,675 |
| Plus super contribution | $10,00 (less 15% tax of $1,500) | |
| Total tax paid (contributions tax and income tax) |
$12,675 | $14,325 |
In summary, Jane will:
- reduce her tax bill by $1650 ($14,325 - $12,675)
- increase her contribution to super by $8500 ($10,000 - contributions tax).
Note: the $8,500 net super contribution is a preserved benefit which can only be accessed once a condition of release has been met. From 1 July 2009, salary sacrifice super contributions will be counted when determining whether you are entitled to various Centrelink benefits.
* Contributions tax of $1500 assuming we have your tax file number. This example does not take into account any other taxes (e.g. taxes that may be payable when you withdraw your super or extra taxes on contributions which exceed maximum limits). Nor does it take into account your personal circumstances so obtain tax or other professional advice. Contact Centrelink for information about the impact of salary sacrifice contributions on benefits.
Limits on before-tax contributions
Employer contributions (including before-tax contributions) in excess of $25,000 (or $50,000 up to 30 June 2012 for persons aged 50 during this transitional period) per financial year will be subject to additional tax of 31.5% (plus Medicare Levy). This is on top of the 15% contributions tax.
