Sacrificing salary to superannuation is a popular strategy used by people looking to increase their retirement savings. In this strategy below we address the steps that need to be followed to ensure a salary sacrifice arrangement is effective.
A salary sacrifice arrangement arises where an employee agrees with their employer to forego all or a part of their salary and have it paid in a form other than as a cash payment. Salary sacrifice arrangements may provide a range of payment options however this Fact Sheet will focus on salary sacrificed superannuation contributions.
Salary sacrificed superannuation contributions are treated as an employer contribution and are counted towards a persons’ concessional contribution cap (currently $25,000 per annum).
The Australian Taxation Office has set out its requirements for a salary sacrifice arrangement to be effective. An ineffective salary sacrifice arrangement is unlikely to achieve the desired tax outcomes.
The basic requirements for a salary sacrifice arrangement include:
- The arrangement must be established before any work is performed that gives rise to remuneration. An arrangement established after the work has been done may be regarded as ineffective.
- There must be an agreement in place between the employer and employee. Preferably the agreement should be in writing.
- The sacrificed salary must be permanently forgone for the period of the agreement.
From 1 January 2020, an employer is no longer able to offset their superannuation guarantee obligations against salary sacrificed contributions. In addition, where an employee enters an arrangement to salary sacrifice part of the salary to superannuation, the salary sacrificed superannuation contributions are added to their ordinary time earnings for their purpose of determining an employer’s overall superannuation guarantee obligations.
A salary sacrifice arrangement can deliver tax benefits for an employee. Consider the following example
| Income components | Without salary sacrifice | With salary sacrifice |
| Gross salary | $90,000 | $90,000 |
| Less salary sacrifice to super | $0 | $10,000 |
| Less tax and Medicare* | $21,517 | $18,067 |
| Net salary | $68,483 | $61,933 |
| Super | ||
| Employer SG contribution | $8,550 | $8,550 |
| Plus salary sacrifice to super | $0 | $10,000 |
| Less contributions tax | $1,282 | $15,768 |
| Net super contribution | $7,268 | $15,768 |
* includes $1,080 Low- and Middle-Income Tax Offset
When a person has a salary sacrifice arrangement in place it is advisable to review the arrangement from time to time to ensure that:
- Contributions are being made in a timely manner (salary sacrifice contributions may not be subject to the same timing regime as applies to superannuation guarantee contributions), and
- Any risk of the combined superannuation guarantee and salary sacrificed contributions exceeding the concessional contribution cap is minimised. While it may not be possible to stop or postpone superannuation guarantee contributions being made, future contributions under a salary sacrifice arrangement can generally be stopped, either temporarily or permanently.
Depending on personal circumstances, it would be prudent to review concessional contributions, and particularly salary sacrificed contributions, at the start, in the middle, and a month or two before the end of each financial year. Where a person receives an irregular income, more frequent reviews might be appropriate.
Once contributions have already been made under a salary sacrifice arrangement, they cannot be reversed. A salary sacrifice arrangement can generally only be stopped in respect to future contributions.
How can an Adviser help
Help you calculate the tax savings
Understanding how much you are saving in tax will encourage you to contribute to super more. An adviser helps you keep up with expenses even if pre tax income is reduced.
Advise if Salary sacrificing is ineffective.
Generally if your income is under $37,000, a salary sacrifice arrangement will save very little tax. There is no tax on your income under $18,201 and the rate on income above this level and up to $37,000 is 19% (in 2020/21).
Monitor your Concessional Contributions cap
If you salary sacrifice a large amount you may run the risk of going over the Concessional Contributions Cap.
If salary sacrificing is not offered at your employer
An adviser can help you contribute to super after tax and help you claim a deduction at the end of the financial year.
Last Updated | 20/06/2020
The content of this document is of a general nature only, and does not consider your personal objectives, financial situation and/or needs. Accordingly, the information should not be used, relied upon, or treated as a substitute for specific financial advice. While all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Centrepoint Alliance Limited nor its employees or agents shall be liable on any grounds whatsoever with respect to decisions or actions taken as a result of you acting upon such information.