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 10% 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 describes the arrangement 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%.
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 10% in compulsory Superannuation Guarantee Entitlements (i.e. $10,000). Given the maximum Concessional Contribution for the 2021/2022 Financial Year is $27,500 the maximum Barney can Salary Sacrifice is $17,500 made up of his Superannuation Guarantee Entitlements of $10,000 and the maximum Salary Sacrifice Amount of $17,500.
Salary Sacrifice - There is a downside
Generally, you must reach preservation age before you can access your super benefit. For more information on accessing your super benefit, please click here. So whilst it may be tax advantageous to salary sacrifice, you must ensure that it is money you will not require until you are eligible to access your super benefit.
Salary Sacrifice Arrangement
For more on Salary Sacrifice, including a Salary Sacrifice Arrangement incorporating a TRIS, please click here.
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