When sacrifice can be a good thing
17/02/2017 Brendan Peach, Associate Financial Planner
Sometimes it pays to work smarter, not harder, and find opportunities to save money in a proactive – yet subtle – manner.
Salary sacrificing is one strategy that can be adopted to help in your long term savings plan. It might seem like a small and insignificant change, but in the grand scheme of things, it can really pack some punch.
In this blog post, we break down the dos and don’ts of salary sacrificing to help broaden your understanding of one more tool you can add to your financial wellbeing toolkit.
For the purposes of this blog post and planning for your long term financial security, we’re going to focus on salary packaging for super.
What is salary sacrifice?
Salary sacrifice (also known as salary packaging) is a government initiative that allows you to pay for some items or services straight from your pre-tax salary – therefore reducing your taxable income and putting more money in your pocket.
It is an Australian Taxation Office approved scheme, but you do need agreement from your employer to be able to take part as they have to pay fringe benefits tax on the benefits provided to you. That is, all benefits except for superannuation.
Who should salary sacrifice?
Everyone’s situation is different but typically, salary sacrifice is particularly advantageous to middle and high income earners.
Not-for-profit organisations have special exemptions and their employees are eligible for attractive benefits that make salary packaging a rewarding option. People working for not-for-profits can receive cash benefits such as entertainment and loan repayments from pre-tax income.
A salary packaging arrangement must be agreed to at the start of employment and should be discussed when finalising contract negotiations. It cannot be retrospective so needs to be in place before you earn the income.
What can you salary sacrifice?
It all depends on who you work for – the benefits available to you are determined by your employer, but most will at least offer salary packaging for super.
Some of the other common benefits include:
- Meals and entertainment
Why salary sacrifice into super?
Giving up some of your pay and redirecting it into your superannuation can be a good way to save tax in the short term, and grow your retirement savings in the long term.
Any pre-tax funds that are contributed to super receive a special 15% tax rate as opposed to that portion of your salary being taxed at your marginal tax rate, which is typically much higher.
What this means, is that the higher the marginal tax rate, the higher the savings.
Having said all that, the super contribution limits are changing and after 1 July 2017, if you have an adjusted taxable income of more than $250,000, you will need to pay 30% tax on super contributions.
Zach earns $80,000 before tax, excluding his employer's super contribution.
If Zach decides to redirect $10,000 of his pay into salary sacrifice super contributions, he will save $1,950 in tax, with the extra money going into his super fund.
Salary sacrifices $10,000
Extra money into super
$62,803 ($1,950 better off)
Assumptions: The figures used in this table are estimates only and are based on 2016/2017 income tax rates and a Medicare Levy of 2%.
- Make sure you can afford to do without the salary sacrificed amount as funds cannot be accessed for the period of the arrangement.
- When speaking to your employer about salary sacrifice, understand that your employer does not have to agree to salary sacrifice, however they still do need to pay the 9.5% Super Guarantee (SG).
- Request that your salary sacrifice agreement be in writing and be signed by your employer for your own protection.
- Seek professional advice to maximise your savings.
- Don’t forget that you are actually giving up part of your salary to redirect it into super, so your take home pay will be lower.
- If you have a current arrangement, don’t forget to adjust your salary sacrifice contributions to avoid going over the concessional cap that is coming into play from 1 July 2017.
- Don’t forget that employer paid super (currently guaranteed at 9.5%) counts toward your concessional cap.
- Don’t lose any of your employer paid super entitlements as a result of salary sacrificing. There is a loophole in the super guarantee rules enabling an employer to cut an individual’s super entitlements when the employee reduces their taxable salary.
- Don’t jeopardise your savings potential by going it alone. You can get help from the professionals and make your money work harder for you.
Where do you start?
The most important do before requesting your employer to start salary sacrificing is to speak to a financial planner who can look at the big picture and see how this piece of the puzzle fits in.
A financial planner can assist in creating an appropriate overall financial strategy and consider salary sacrifice in the context of your long term plan.
Call The Hopkins Group on 1800 726 082 and ask to speak to a financial planner who can help assess if salary packaging is a good option for you. You can also fill out an online enquiry to get in touch with our team.
Disclaimer: Brendan Peach is an Authorised Representative and John Hopkins Financial Services Pty Ltd is a Corporate Representative of WealthSure Financial Services Pty Ltd Level 1 190 Stirling Street PERTH WA 6000 ACN:130 288 578 AFSL: 326450.
General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.
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