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Case Study: TRIS & Salary Sacrifice


 
 
Salary Sacrifice and TRIS Case Study Example

Let's consider a Case Study demonstrating how much tax you can save by commencing a TRIS Strategy in combination with a Salary Sacrifice Strategy whilst you are still working.

Example:

Barney is 58 and is still working.  That is he is NOT "Retired".  Barney has a Super Benefit of $1,000,000.  His Super Benefit is broken down into a "Taxable Component" of $800,000 (built up from Employer Contributions) and a Tax Free Component of $200,000 (built up from Personal Non Concessional Contributions).  This means that 80% ($800,000/$1,000,000) of Barney's Super Benefit is Taxable and $20% ($200,000/$1,000,000) is Tax Free. 

Barney commences a TRIS on 1 July 2020.  This is the appropriate Pension to commence given that Barney is NOT "Retired".  Barney withdraws 4% of his Super Benefit as a Pension, that is $40,000.  The Tax Free portion of the Pension Income is 20% (i.e. $8,000) and the Taxable portion of the Pension Income is 80% (i.e. $32,000). 

Barney has no income other than his salary income from working of $100,000.  The SMSF has generated a Taxable Income of $60,000 made up of taxable interest and dividend income and realised capital gains from the sale of shares during the financial year.  Franking Credits on the dividend income is $10,000.

Barney is contemplating whether to Salary Sacrifice $15,000 into his SMSF acknowledging that he can take a Pension payment of $40,000 to supplement the amount sacrificed into his SMSF.  The tax savings of implementing a Salary Sacrifice Strategy in combination with a TRIS are detailed below:

 
 
Case Study Result

Tax Result in SMSF TRIS & Salary
Sacrifice (Under 60)
TRIS & Salary
Sacrifice (Over 60)
No TRIS &
No Salary Sacrifice
SMSF Income $60,000 $60,000 $60,000
Salary Sacrifice Contributions $15,000 $15,000 $0
Dividend Gross Up $10,000 $10,000 $10,000
Total Income $85,000 $85,000 $70,000
Tax on SMSF Income ($10,500) ($10,500) ($10,500)
Tax on Salary Sacrificed Contributions ($2,250) ($2,250) $0
Franking Rebate $10,000 $10,000 $10,000
SMSF Tax Refund / (Payable) ($2,750) ($2,750) ($500)

 

Tax Position in Personal Name TRIS & Salary
Sacrifice (Under 60)
TRIS & Salary
Sacrifice (Over 60)
No TRIS &
No Salary Sacrifice
Salary Income $100,000 $100,000 $100,000
Less: Salary Sacrifice $15,000 $15,000 $0
Taxable Pension Income $32,000 $0 $0
Total Taxable Income $117,000 $85,000 $100,000
Tax Payable ($33,127) ($20,872) ($26,497)
Low Income Tax Rebate $0 $0 $0
New Low and Middle Income Tax Offset $270 $1,080 $780
Pension Rebate $4,800 $0 $0
Personal Tax Refund / (Payable) ($28,057) ($19,792) ($25,717)

 

Overall Tax Result TRIS & Salary
Sacrifice (Under 60)
TRIS & Salary
Sacrifice (Over 60)
No TRIS &
No Salary Sacrifice
SMSF Tax Refund / (Payable) ($2,750) ($2,750) ($500)
Personal Tax Refund / (Payable) ($28,057) ($19,792) ($25,717)
Reduction in SGC (Worst Case) ($1,425) ($1,425) $0
TOTAL Tax Refund / (Payable) ($32,232) ($23,967) ($26,217)

 

 
 
Case Study Result - Over 60

The above example demonstrates that commencing a TRIS in conjunction with a Salary Sacrifice Strategy when over age 60 has saved Barney $2,250. In this example, this is an annual tax saving and demonstrates the taxation savings available by commencing a TRIS in conjunction with a Salary Sacrifice Strategy after age 60. A more interesting aside is that Barney Salary Sacrificed $15,000 in pre-tax income. After tax he would have received only $65,208 to use to fund living expenses. The extra income he has sacrificed has been made up by accessing a Pension Income of $40,000. Barney has also maintained his living standard and saved $2,250 in tax. If Barney's employer does the right thing and pays Barney's SGC on his full salary of $100,000 and most employer's will do this (see the "Reduction in SGC Contributions" section below) then Barney's tax savings further increase to $3,675. You should obtain your own independent financial and taxation advice about which course of action is appropriate to your circumstances.

 
 
Case Study Result - Under 60

The above example demonstrates that Barney is actually worse off by commencing a TRIS in conjunction with a Salary Sacrifice Strategy when under age 60 as he needs to pay an additional tax of $6,015. The TRIS Strategy in combination with a Salary Sacrifice Strategy is not always beneficial because TRIS pension payments are taxed when you are under 60. The results vary from person to person.

 
 
Reduction in SGC Contributions

A relatively unknown loophole in the Superannuation Guarantee Contribution (SGC) rules enables an employer 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. For example, say, Barney earns $100,000 a year plus SGC (9.5%). Barney can expect to receive $9,500 in SGC taking his total salary package to $109,500. To the extent that Barney salary sacrifices $15,000 as in the above example, Barney's employer is then only liable to pay SGC on Barney's net salary after the salary sacrificed amount (i.e. on $85,000). This causes a reduction in Barney's SGC entitlements of 9.5% of $15,000 or $1,425.  


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