The benefits and considerations of salary sacrificing

Info for members
Insights
05 Nov 2021
8 min read

Find out the benefits of salary sacrificing into your super and understand the considerations before you choose this path.

What is salary sacrificing?

Salary sacrificing is when your employer pays some of your income into your super account instead of into your normal pay. This is taken from your ‘pre-tax income’ and is additional to the compulsory superannuation guarantee (SG). The SG rate in Australia is 10%.

Generally, you can choose how much extra salary you sacrifice. To decide how much to put in, it’s best to look at your financial situation and goals. Professional advice may also be useful.

Putting extra into your super from your salary could have financial benefits, which we’ll go into in more detail below.

What are the benefits of salary sacrificing into super?

The pros and considerations of salary sacrificing into super will depend on your individual financial situation. Here are some of the potential advantages:

You can increase your super savings for retirement

If you can afford to reduce your take-home pay in the short term and put more towards your super, you’ll generally have more money for retirement.

Generally, employers are required to contribute at least 10% of your earnings into your super, but it’s possible that if you rely solely on it, you may not accumulate enough to cover your lifestyle in retirement.

Contributing extra to your super savings now may boost your nest egg in the long-term. Not only will you have increased your account balance, but you’ll also benefit from compound interest (that’s interest on top of interest) whilst the money is in your fund, and the wealth grows.*

You may pay less tax

In general, you may pay less tax on the salary sacrifice portion of you pay in your super account, less tax on investment earnings whilst it’s in your account, and potentially, less tax on your overall assessable income.

  • The amount that you sacrifice is treated as an employer contribution and is taken from your before-tax income. Employer contributions are charged a concessional (discounted) tax rate of 15% which is likely less than what would be taxed at the marginal tax rate.
  • As a result of receiving less take-home pay (with more of your pay going into super), your assessable income will be lower, which generally means you pay less income tax.*
  • While your salary sacrificed contribution is invested in your super fund, the tax on the income of your investments is 15% which is likely to be lower than if it was invested outside of super.*

You can take advantage of the First Home Super Saver Scheme

To help you save to buy or build your first home and if eligible, the First Home Super Saver Scheme (FHSS) allows you to access up to a total of $30,000 ($60,000 for couples) by contributing $15,000 per financial year, into your super. Only voluntary contributions such as salary sacrifice, and after-tax personal contributions count towards the FHSS savings. Members of the Defined Benefit Division (DBD) can only use voluntary contributions to the accumulation component.

Generally, to take part in the scheme, you must be:

  • aged 18 or over (although you can start contributing when you’re younger)
  • buying or building your first home
  • planning to live in the home for at least 6 months within a year of you being able to move in (within the first 12 months you own it).

To see all eligibility criteria and read more about the FHSS scheme on the ATO website.

What should you consider before salary sacrificing into super?

Whilst choosing to salary sacrifice into your super has benefits, it’s not for everyone, and there are some things to think about before you commit.

You may exceed the concessional contributions cap

An annual cap of $27,500 applies to concessional (before-tax) contributions to your super. Although if you’re eligible you may also be able to carry forward unused portions of the applicable before-tax cap over a rolling five-year period. Read more on the caps on super contributions page.

Generally, if you go over the cap, the excess contribution is included as assessable income in your tax return, and taxed at your marginal rate, minus a 15% offset. *

Contributions that count towards your concessional contributions cap include:

  • the compulsory super guarantee
  • salary sacrifice
  • personal contributions permitted as income tax deductions

A full list of what falls under concessional contributions, is available on the ATO website.

What can you do to avoid exceeding the cap?

Before you set up a salary sacrifice arrangement, calculate whether the sum of all your concessional contributions will be greater than the cap. Keep in mind that the cap applies to all contributions received by any of the super funds you're a member of. If you aren’t sure if you’ll exceed the cap, our Contributions planner may help you to work it out.

What can you do if you exceed the cap?

The ATO will notify you of your options and generally you have the following choices:

  1. Request to withdraw up to 85% of your excess concessional contribution from your super fund to pay your income tax liability, or.
  2. Keep the excess contribution in your super fund and pay the income tax liability on the contribution from your own available funds. The excess contribution will count towards your non-concessional (after-tax) cap.

Note, you may not be able to withdraw excess contributions made into a defined benefit account. To find out more about super contributions and caps for DBD members see the caps on super contributions page or contact us.

You may pay Division 293 tax

If your income is $250,000 or more in a particular financial year, you may need to pay Division 293 tax.

Division 293 tax may apply if you earn over the Division 293 threshold as a result of high wage earnings, or to a one-off event like receiving a termination payment or a capital gain.

Generally, the Division 293 tax imposes an additional tax of 15% on some or all of your contributions. Given this it’s important to consider your annual income when considering a salary sacrifice arrangement.

You might find yourself short on money

Generally, any money you put into super won’t be accessible until you reach your preservation age or retire, which could be years away. While this long-term savings plan will likely be beneficial to you as you reach retirement, it might impact your day-to-day spending habits now.

For this reason, it’s important to be sure you can afford to go without that money. You may consider weighing up your current expenses and determine whether that money would serve you better in the short term if you directed it elsewhere, such as by paying down debt.*

Generally, it might be beneficial to make after tax-contributions if you think you could be eligible for the government co-contribution.

If you’re an existing DBD member you can generally make salary sacrifice super contributions as part of your default member contributions.

How to set up a salary sacrifice arrangement?

Start by speaking to a financial advisor or accountant to evaluate whether salary sacrifice is manageable and beneficial in your circumstances. If you think it is, then speak to your employer to arrange with them directly.

Your employer will confirm how they’d like you to put in the request. It may be an informal email, or they may recommend a formal contract.

Can your employer decline your request for salary sacrifice?

Yes. Your employer isn’t obligated to accept your request for a salary sacrifice into super arrangement, or they may not agree to the terms you requested and need to negotiate different terms with you.

Even if your employer agrees to the arrangement, they may impose limits on how often you can renegotiate the terms of the arrangement, as this may be extra administration for them.

If your employers refuse to allow a salary sacrifice arrangement, you can make after-tax contributions into your fund. You may be able to claim them as a tax deduction. See more about claiming on personal contributions on the ATO website.

In summary...

A salary sacrifice arrangement can be a useful option for increasing your long-term super savings. Possible benefits include tax savings, potential participation in the First Home Super Savings Scheme and more money available for your retirement. 

As long as you’re careful not to exceed your concessional contributions cap and provided you can do without the funds in the meantime, salary sacrificing to super could be a good option for you to  make additional contributions to your retirement nest egg.*

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