While you’re saving for your retirement, it’s worth thinking about what you want to be doing when you finish working, and how much it might cost you.

A comfortable retirement isn’t about fancy cars and expensive meals out every night of the week. It’s simply about maintaining the lifestyle you’ve worked so hard to build up.
 
It’s no more than you’d expect after a lifetime of hard work.
 
But it doesn’t come cheaply. The latest estimates suggest a comfortable retirement costs around $58,610 a year for a couple1. And with Australians living longer and enjoying more active retirements than ever, your savings will need to last the distance.
 
But with the average super balance at retirement standing at around $198,000 for men and $112,000 for women, there’s a big gap between hope and reality for many people when they retire.
 

Closing the gap

To make up the shortfall in your super, you’ll need to save more yourself. And one way to do that is through salary sacrifice.
 
Salary sacrifice is one of the most tax-effective ways to boost your super. You can pay up to $25,000 into your super from your pre-tax salary at the concessional 15% rate of tax (or 30% if you earn over $300,000 a year). That’s a big tax saving for most people on their usual marginal tax rate, which can be up to 47% (ignoring the additional 2% temporary budget repair levy).
 
It’s a great way to close the gap between where you are now and where you want to be in retirement, and really own your tomorrow.

What are concessional contributions?

Concessional contributions are payments made into your super before tax. These can include, payments made by your employer and salary sacrifice contributions.
 
If you are self-employed, contributions for which you claim a tax deduction are also classified as concessional contributions.
 
Your superannuation fund will generally pay 15%2 tax on these contributions.

What is salary sacrifice?

When you salary sacrifice into super, you enter into an arrangement with your employer to give up part of your before-tax salary and/or bonus. Instead, your employer pays this amount into your super account. This is in addition to the compulsory superannuation guarantee amount your employer is required to contribute.
                                         

What are the benefits?

One of the benefits of salary sacrifice contributions is that they are generally taxed in the super fund at 15% instead of your marginal tax rate, which could mean a saving of up to 32% (including Medicare levy, excluding the additional 2% temporary budget repair levy)2.

That’s because the amount you give up is treated as an employer contribution and is not included in your assessable income. Plus once you’re 60 and access your super (for example at retirement), you can receive your super tax free, which means your super savings can be even more tax-effective.

There are limits!

The annual individual limit on concessional contributions, including employer superannuation guarantee and salary sacrifice, is $25,000. For the self-employed, this cap also includes personal contributions you make for which you claim a tax deduction.

Excess concessional contributions are added to an individual’s taxable income, and taxed at their marginal tax rate, less a 15% tax offset for tax already paid on the contributions plus an interest charge to reflect that the excess has been in the concessional superannuation environment.
 
People have the choice to withdraw excess concessional contributions from their superannuation fund. If they are not withdrawn, any excess concessional contributions will also be included in the personal non-concessional (after-tax) annual individual limit of $180,0003.
 
If you have over the concessional contributions cap amount to invest you could still make non-concessional contributions into your super or alternatively you can consider a range of non- super investments.

Your employer super payments may not be enough to meet your retirement goals.

 
Case study
Michelle, aged 45, is a teacher who will earn a salary of $80,000 and receives 9.5% in superannuation guarantee contributions from her employer of $7,600 in the 2017/18 financial year. She currently saves around $11,000 a year and wants to start building up her super.
 
Michelle’s financial adviser suggested she salary sacrifice $16,794 (within her concessional cap of $25,000 after including her employer’s superannuation guarantee contribution of $7,600) instead of putting her $11,000 in super from her after-tax income.
 
How salary sacrificing works



By salary sacrificing $16,794, Michelle is still taking home the same amount. However, she is better off salary sacrificing compared to putting her $11,000 savings into super. She’s paying $5,794 less in income tax and she will be adding $3,275 more to her super each year.

This example is illustrative only and not an estimate of the tax savings you will receive. Please talk to your adviser about your individual circumstances.
 
 

Some important points to remember

  • The amount you salary sacrifice is not subject to pay as you go (PAYG) withholding tax. The amount that you salary sacrifice will be reported in your payment summary and may affect entitlements for certain tax offsets and Government benefits.
  • You’ll only be taxed at your marginal tax rate on your reduced salary (that’s your salary less your concessional contributions)
  • Your salary sacrifice contribution will generally be taxed at the concessional rate of 15% when it is received by your super fund2.
  • Your salary sacrifice is not a fringe benefit and is not subject to fringe benefits tax.
  • You cannot access any of your salary sacrifice contributions until you reach your preservation age4.

How do I start to salary sacrifice?

Step 1 – Check if your employer allows salary sacrificing and if it impacts your super guarantee contributions.
Step 2 – Calculate how much your super guarantee will add up to for the financial year.
Step 3 – Think about how much you want to contribute from your future salary, future bonus or future leave entitlements.
Step 4 – Talk to your financial adviser to make sure salary sacrifice is the right options for you.
Step 5 – Put the agreement with your employer in writing.
 

Need  more information?

To find out more about the tax advantages of salary sacrifice and whether it would be a good strategy for you, contact us on 9442 0000.  Speak to your financial adviser to find out more about what would be best for you.



1 ASFA Retirement Standard September Quarter 2015. Based on a couple retiring in NSW they will require $58,610 annually to maintain a comfortable lifestyle in retirement.
2 Individuals earning over $300,000 are generally subject to 30% tax on contributions, being 15% deducted when the contribution is made to the super fund and another 15% payable on assessment after lodging their income tax return.
3 The non-concessional contributions cap is calculated at six times the level of the standard $30,000 annual concessional contributions cap. If you’re under 65, you can generally bring forward two years’ worth of non-concessional contribution limits into the year you’re currently in. This means you can make a lump sum contribution of up to $540,000 in one year. This can be handy if you want to put in a large amount from an inheritance or sale of an investment property for example.
4 Your preservation age is usually between the ages of 56–60 depending on which year you were born. To access super, you will need to meet a condition of release after reaching this age.

 


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