Pension & Salary Sacrifice

What is Salary Sacrifice

Salary Sacrifice describes the strategy of entering into an agreement with your employer to pay part of your pretax salary directly into your SMSF.  Salary Sacrifice contributions are those contributions made by your Employer over and above their Superannuation Guarantee or award obligations.

Strategy Tax Benefits

The financial benefit in adopting a strategy of salary sacrificing is that the contributions made into 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.  If you are on the top marginal tax rate of 47% you can save up to 32% on each dollar you salary sacrifice into super.

Your Tax Rate is Important

It is generally recommended that you earn above $18,200 (putting you in the 21% tax bracket) before contemplating a salary sacrificing strategy. 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 makes to salary sacrifice as you know you will be able to access the money sooner when you retire.

Accelerate Salary Sacrifice close to Retirement

Imagine you were able to salary sacrifice for more than one year or better still salary sacrifice an amount in excess of $10,000 per annum. The savings would exponentially multiply.  In fact a typical strategy adopted by clients is to accelerate their salary sacrifice strategy close to retirement (say 5 or even more years out from retirement).  They can do so with the comfort that they will be able to access the salary they sacrifice sooner as they are closer to retirement.

Watch your Contribution Limits

The Concessional Contribution limit applicable for a given Financial Year is as follows.  The limits apply to the total of your Super Guarantee, Salary Sacrifice and Personal Concessional Contributions where a tax deduction is claimed. 

Income Year Concessional Contributions Cap per member per annum
2020-21 $25,000
2019-20 $25,000
2018-19 $25,000

TRIS Strategy in combination with a Salary Sacrifice Strategy

The effectiveness of a Salary Sacrifice Strategy is magnified when incorporated with a TRIS Strategy. This strategy basically involves you salary sacrifice as much of your income as you can afford (subject to limits) on one hand and on the other you receive a Pension income stream from your SMSF to help fund your living costs.  You can think of it as a "round robin" strategy where the money that is salary sacrificed is channeled back to you as a pension payment but in the process saving you thousands of dollars in tax.

TRIS Strategy allows you to maximize Salary Sacrifice Benefits

The major problem with a Salary Sacrifice Strategy is that it considerably reduces the income you have to live on.  With a TRIS Strategy this is somewhat mitigated as you can pay yourself a pension income from your SMSF.  This maximizes the amount you can afford to salary sacrifice maximizing your tax savings leading up to retirement and giving you more in Super Benefits when you retire.

TRIS & Salary Sacrifice after age 60

After the age of 60, implementing a TRIS Strategy in combination with a Salary Sacrifice Strategy is a possible tax saving strategy because all pension payments are tax free after 60.  The tax saving benefits accrue on two levels.  The first is that you pay less tax on the salary you sacrifice.  The second is that there is no tax payable on the TRIS you draw from the SMSF.  You should obtain your own independent financial and taxation advice about which course of action is appropriate to your circumstances. 

TRIS & Salary Sacrifice under 60

Commencing a TRIS Strategy in combination with a Salary Sacrifice Strategy may be a worthwhile financial exercise producing tax savings if you are aged between Preservation Age and 59 as you pay less tax on the salary you sacrifice.  However offsetting this tax gains is the tax that you pay on the TRIS you draw from the SMSF (which we note is concessionally taxed and receives a 15% "Pension Rebate").  You should obtain your own independent financial and taxation advice about which course of action is appropriate to your circumstances.

TRIS & 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.  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, 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.  Barney may still be better off by following the salary sacrificed strategy however the SGC reduction is definitely an issue to note.  Typically most employers are nice and they will do the honorable thing and pay the SGC on the gross salary of $100,000 and not the net salary of $85,000.  But definitely ask your employer first.  You will at least find out how nice they are if nothing else!

Case Study

To demonstrate the benefits of commencing a TRIS and Salary Sacrifice Strategy, click here to view a Case Study.

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To establish a TRIS, please submit an Online Application Form here.

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