(03) 9020 2905Updated: 20 October 2015
PORTFOLIO POINT: Don’t go into salary sacrifice blindly just because you’ve heard you should. There are plenty of potential traps. Here’s how to avoid some of the potholes.
Salary sacrifice should be a reasonably simple affair. You pass a signed note to your employer that you’d like to put some extra away into super. And off it goes.
But, sadly, salary sacrifice doesn’t necessarily work “just like that”. Salary sacrifice is actually quite complex and it’s very easy to get these arrangements wrong. And if you haven’t done the proper research, you might only have yourself to blame.
Poorly planned salary sacrifice arrangements can achieve nothing for you. Worse, some salary sacrifice arrangements might benefit your employer rather than you. And worst, they could end up being a costly disaster.
The theory of super salary sacrifice is that you are agreeing to forgo some salary now to allow you to build up your super balance. This can make sense if the marginal tax rate you are paying now is higher than the 15% contributions tax for superannuation.
Those earning more than $37,000 a year in Australia will be paying a marginal tax rate of 32.5%, plus the 2% medicare levy. If you earn more than $80,000, you will pay 39% (including medicare levy) and if you earn more than $180,000 a year, you’ll pay 49% to the taxman.
The difference between your marginal tax rate and 15% is therefore the savings that you could potentially make by salary sacrificing into super. You can reduce your overall tax burden and have more into super at the same time.
That is, if you’re earning $100,000, you could salary sacrifice $10,000 into your super fund rather than take it as salary. If you took it as salary, you’d lose $3900, leaving you with $6100. If you sent it off to super instead, you’d lose $1500 in tax, leaving $8500 remaining in your super fund. There’s a tax saving of $2400.
And, in many circumstances, that sounds great.
First hurdle
The first hurdle is actually your employer. A salary sacrifice arrangement is actually an agreement between you and your employer. And it’s not compulsory for business to include salary sacrifice as part of their employment arrangements.
If they don’t offer salary sacrificing – outside of begging them to change their policy – your quest is ended.
Ratbag employers
Then there’s the ratbag element. Those employers who use salary sacrifice as a way of getting out of their own obligations. And there are many ways that they can do this through salary sacrificing.
For a start, the obligation on an employer to make super contributions on behalf of employees is that 9.5% of the employees salary goes into super. In our example above, for an employee earning $100,000, the employer needs to make sure that $9500 goes into super.
If the employee is salary sacrificing $10,000 into super, then the 9.5% is covered by the employee. Yes, that’s correct. In this case, it’s possible that the employee will no longer be getting the $9500 (9.5% of his $100k salary) paid into super by his employer, because he decided to salary sacrifice a portion of his salary. There is hope the government will legislate to stop this happening, but it’s been a dream for quite some time.
Alternatively, the employer could say that the employee’s salary is now not $100,000, but $90,000. From the ATO’s perspective it is only $90,000. In that case, the employer might only pay 9.5% SG on $90,000 instead of 9.5% on $100,000.
There are other ways that ratbag employers can also use salary sacrifice arrangements to decrease their liability to what I would describe as moral obligations.
Consider someone salary sacrificing their age-based maximum of $30k or $35k, who is then retrenched. The employer could potentially make the payout of holiday pay, sick leave, long service leave, or redundancy entitlements based on the salary sacrifice-reduced wage.
Research your employer
If you’re considering a salary sacrifice arrangement with your employer, you need to do your research with the payroll department. These questions are a starting point.
- Do they offer salary sacrifice?
- Will they pay it into your choice of fund (including your SMSF)?
- What will they use as your base salary for superannuation guarantee contributions, termination payments and other entitlements?
- Will they continue to pay the 9.5% SG contribution on your “full” salary, rather than what remains after salary sacrifice?
And don’t take a wink and a nod from your HR department. Get it in writing and signed by someone that matters in the building.
Beware of your limits
You also need to make sure that you don’t trip your age-based concessional contribution limits. Employers are under no obligation to tell you that the 9.5% SG that they are putting away for you, added to whatever you’ve salary sacrificed, is going to put you over your $30k, or $35k, limit and therefore leave you with a potentially bigger tax burden than you would have been in if you hadn’t decided to salary sacrifice.
Greater importance
Given that there is no sign of concessional contribution limits being lifted anytime soon, salary sacrifice is going to become more and more important to younger and younger Australians.
It will become – it certainly should become – far more common for people in their early 40s to be considering salary sacrificing something into super because they won’t be able to load up later in life.
Just be careful. You can’t trust your employer to be a good bloke. Ask the question. Or see a financial adviser who will ask the questions for you. The cost of making mistakes here is far too costly.
*****
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as this, you are advised to consult your financial adviser.
Bruce Brammall is director of Bruce Brammall Financial and author of Mortgages Made Easy.