What is Salary Sacrifice?
Your Employer is legally obliged to contribute superannuation for you into a Complying Superfund which includes an SMSF. The amount your Employer must contribute is equal to 9.5% of your salary. In addition to the contributions your Employer makes on your behalf, you have the option of "salary sacrificing" additional super contributions if you choose so. Salary sacrificing simply describes the strategy of entering into an agreement with your Employer to pay part of your pre-tax salary directly into your SMSF. This means that your total remuneration needs to be renegotiated with your Employer where you agree to a reduced salary in return for additional superannuation contributions.
The salary sacrificing contributions made to your SMSF are not taxed in your personal name but in the SMSF at 15%. So if your personal tax rate is more than 15% there is a tax advantage in salary sacrificing.
Assume you are on the highest marginal tax rate of 45% and you salary sacrifice $10,000. The amount sacrificed of $10,000 will not be taxed in your name saving you $4,500. It is however taxed in the name of your SMSF at 15% resulting in a tax liability to your SMSF of $1,500. This is a net tax benefit to you of $3,000. It is important to note however that the tax benefit you receive is the difference between your tax rate and the SMSF tax rate of 15%. Accordingly the higher your personal tax rate the better the tax savings associated with salary sacrificing.
Maximum amount that can be Salary Sacrificed
Salary Sacrifice Contributions are Concessional Contributions (see here for more on Concessional Contributions). The Maximum amount you can Salary Sacrifice (including your Superannuation Guarantee Entitlements) is as follows:
Concessional Contributions Cap
per member per annum
Barney is 45 and on an annual salary of $100,000 and receives 9.5% in compulsory Superannuation Guarantee Entitlements (i.e. $9,500). Given the maximum Concessional Contribution for the 2019/2020 Financial Year is $25,000 the maximum Barney can Salary Sacrifice is $15,500 made up of his Superannuation Guarantee Entitlements of $9,500 and the maximum Salary Sacrifice Amount of $15,500.
Considerations when Salary Sacrificing
It is generally recommended that you earn above $18,200 (putting you in the 21% tax bracket) before contemplating salary sacrificing. Assuming this is the case, then the main consideration when deciding whether to salary sacrifice is the fact that the amount being sacrificed into super is preserved until you retire. This means that you need to salary sacrifice only as much income as you can afford to give up, that is not required to fund living expenses. Obviously the closer you are to retirement the more sense it make to salary sacrifice as you know you will be able to access the money sooner when you retire.
Salary Sacrifice - There is a downside
A relatively unknown loophole in the Superannuation Guarantee Contribution (SGC) rules enables an employer (if they're nasty) to cut an individual's SGC entitlements when an employee reduces their taxable salary via a salary sacrificing arrangement. This in effect cuts the employee's total salary package, unless the employee has a written contract stating otherwise.
Assume Barney earns $80,000 a year plus Employer Super (9.5%). Barney can expect to receive $7,600 in Employer Super taking his total salary package to $87,600. To the extent that Barney salary sacrifices say $15,000 he will save $5,100 in personal tax and pay 15% contributions tax as the salary sacrificed income is a Concessional Contribution taxed at 15% in Barney's SMSF (i.e. $2,250). This is a net tax saving of $2,850 to Barney.
However Barney's Employer is then only liable to pay Super on Barney's net salary after the salary sacrificed amount (i.e. on $65,000). This causes a reduction in Barney's Employer Super entitlements of 9.5% of $15,000 or $1,425. Barney is still better off by $1,425 by following the salary sacrificed strategy however the Super reduction is definitely an issue to consider. Typically most Employers are nice and they will do the honourable thing and pay the SGC on the gross salary of $80,000 and not the net salary of $65,000. But definitely ask your Employer first. You will at least find out how nice they are if nothing else!
Salary Sacrifice Strategies
For more on Salary Sacrifice, including a Salary Sacrifice Strategy incorporating a TRIS, please click here.
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