Tuesday, 19 June 2012

Tax time: Salary sacrificing into superannuation

In the lead up to the end of the financial year I am doing a series of posts on last minute things you can do to reduce your tax.  This post will also tie in with the superannuation series I have been writing over the past few weeks. 

In previous posts I have mentioned that under Australian law your employer has to contribute 9% of your total wage (including bonuses etc) into superannuation for your retirement.  The government also incentives you through tax breaks to contribute more.  If you earn more than $37,000 before tax you can reduce the tax you pay through contributions to superannuation.  However you should remember that if you contribute this amount then you will not be able to touch it until you retire.  It is important to remember the above because tax should not drive your investment decisions but should be part of the decision making process.

You may have heard the term 'concessional contribution' quite often though asked the question 'what is a concessional contribution?' or 'how do concessional contributions work?'.  The concessional contribution is the amount of money that you can put into super in a given year that is taxed at the 'concessional' rate of 15%.  In 2011 / 2012 this is $25,000 if you're under 50 and $50,000 if you're over 50.  Note that this includes the amount that your employer is contributing to your superannuation as well as any benefits they pay for you through super (e.g. life insurance).

If you earn $100,000 (pre-tax) you're employer has to contribute $9,000 towards your super.  This means than you can contribute an extra $16,000 (pre-tax). 
  • At this wage you would be in the 37% tax bracket
  • The tax on the $16,000 would be $5,920 ($16,000 * 37%)
  • If you salary sacrificed this into super you would only pay $2,400 in tax
  • You would therefore be $3,520 better off
If you earn more than this (or are over 50) the potential benefits are even better!  Always keep in mind though that this money is not available to you until you retire. 

Beware the pitfalls

One thing you need to be aware of is that technically your employer can use the amount you salary sacrifice to complete their obligations (i.e. they are screwing you) so you need to amend your employment contract to ensure that any amount you salary sacrifice is after the amount they contribute on your behalf

1 comment:

  1. well this is really interesting calculation. saving lots of tax money by salary sacrificing into super.