Salary sacrifice into superannuation is one of the simplest, yet most tax-effective ways you can build wealth to assist you in achieving your lifestyle goals and objectives in retirement. Salary sacrifice is an arrangement between you and your employer where you agree to forego part of your pre-tax salary in return for your employer using those funds to increase your superannuation contributions. It simply means, instead of receiving part of your salary in cash you decide to invest it into your superannuation fund.
What are the benefits of salary sacrifice?
Tax savings – When correctly structured, salary sacrifice into superannuation can result in a reduction in taxable income, and therefore reduce the amount of personal income tax you pay in the year the salary sacrifice occurs. This then allows you to contribute more funds into superannuation, building up your retirement savings.
This tax saving occurs because tax on your salary can be anything from 0% to 45% (plus Medicare levy), whereas you will only pay 15% contributions tax on superannuation contributions if you stay within the concessional cap limits. Individuals with income above $300,000, using the adjusted definition set by the Australian Taxation Office, will be required to pay 30% contributions tax on concessional contributions, as opposed to the standard 15%.
In these particular cases, a tax saving may still be applicable. In addition, you can accumulate funds in superannuation where earnings are taxed at a maximum rate of 15% as opposed to your marginal rate of tax, which could be as high as 45% (plus Medicare levy).