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Salary sacrifice to cut tax and boost your super

Salary sacrifice to cut tax and boost your super

This time of year, people’s thoughts start turning to their tax return, but it can also be a good time to set things up so you don’t pay more tax than required next financial year.

Simply talking to your employer about setting up an arrangement to “sacrifice” some of your pre-tax salary could potentially lower your tax bill – and boost your retirement nest-egg.

Reducing your tax bill

Although it can sound complicated, a salary sacrifice arrangement simply involves coming to an agreement with your employer to pay for everyday items or services you would normally pay for out of your after-tax salary directly from your before-tax salary. This might include things like childcare, health insurance or super. The benefit is that this reduces the level of income the ATO uses to calculate your tax bill.

Salary sacrifice arrangements deliver the biggest benefit to people on mid to higher incomes as it has the potential to reduce their tax-assessable income the most, but anybody can use them.

If you set up a salary sacrifice arrangement with your employer, it’s important to understand that while your taxable income is lower, the benefits are still listed on your annual payment summary. For some people, this reduces the tax offsets, child support payments or other government benefits they receive, limiting the value of salary sacrifice.

Salary sacrificing options

The items or services you can pay for using salary sacrifice depend on your employer.

Some employers are prepared to let their employees salary sacrifice for expenses such as cars, health insurance, school fees, and home phones. Others are not prepared to do this, as they may end up paying Fringe Benefits Tax (FBT) on the benefits you receive.

Employers are usually more willing to allow you to package FBT-exempt work-related items such as portable electronic devices, computer software, protective clothing or tools of trade, as these generally don’t result in FBT bills.

Boost your super account

One of the most common forms of salary sacrifice is redirecting some of your pre-tax salary into your super fund. Most companies are willing to provide this option as it not only helps you build your retirement savings, but it can also earn them a tax deduction.

When you salary sacrifice into your super, your contributions are taxed at 15 percent when your super fund receives the money. For most people, this is a lower tax rate than if they received the money as normal income.

A further bonus with salary sacrificing into super is you only pay 15 percent on any investment earnings you receive inside super, instead of your marginal tax rate for investments held outside super.

Find out what’s on offer

If you’re interested in a salary sacrifice arrangement, it’s a good idea to discuss the subject with your employer or HR team to find out the company’s policy.

It’s also a good idea to talk to us before signing a salary sacrifice agreement, as the value of these arrangements needs to be weighed up carefully against your reduced take-home pay and the potential loss of government benefits.

These arrangements should be put in writing before you earn the income you are sacrificing, so you need to talk to your employer prior to the start of the new financial year if your salary will change from 1 July.

If you would like help working out if a salary sacrifice arrangement makes sense for you, call our office today.

Tips for employers

Allowing your employees to salary sacrifice can help them reduce their tax bill and it boosts engagement with your business. Another overlooked benefit is if your employee salary sacrifices into their super, you can claim a tax deduction for their contributions, as they are considered employer contributions.

To do this, you need to ensure you create an ‘effective’ salary sacrifice arrangement meeting the ATO’s guidelines. Otherwise, the benefits your employee receives are considered part of their taxable income.

Effective arrangements require a clear agreement stating the terms and conditions and they must be documented in writing to avoid any uncertainty or future disputes.

Sacrifice arrangements can only apply to wage and salary payments for work yet to be performed, not past earnings. Salary and wages, leave entitlements, bonuses or commissions accrued prior to the arrangement cannot be used.

A simple way to avoid problems is to document your employees’ salary sacrifice arrangements before the start of a new financial year – or whenever there is a change to their salary – so it covers future earnings.

If your employee chooses to sacrifice into their super, you must pay it into a complying super fund or it will be considered a fringe benefit. Generally, there is no limit on the amount an employee can salary sacrifice into super, but they must not exceed their annual concessional contribution cap or they will pay additional tax.

You need to keep detailed records of these arrangements for five years and list all sacrifice amounts on the employee’s annual payment summary.

How using salary sacrifice can boost your super

Takashi earns $85,000 before tax and before his employer’s 10% Superannuation Guarantee (SG) contribution.

He has a salary sacrifice arrangement with his employer allowing him to contribute $12,000 from his pre-taxed salary into his super account. These salary sacrifice contributions are taxed at 15% when they enter his account, resulting in a $10,200 annual contribution.

By using this arrangement, Takashi pays less tax overall and boosts his retirement savings.

Takashi’s salary arrangements No action Annual salary sacrifice of $12,000 into super
Pre-tax income $85,000 $85,000
Contribution into super $0 $10,200
Taxable income $85,000 $73,000
Tax $17,012 $13,112
Take-home pay $67,988 $59,888
After-tax position $67,988 $70,088
($2,100 better-off)

Note: Calculations use 2021-22 income tax rates and the LITO and LMITO offsets, but do not include 2% Medicare Levy.

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