Adding a little extra money into your super before you’re taxed – known as salary sacrifice – could really boost your balance for the future.
Salary sacrifice is an arrangement with your employer (‘You’ – in the case of a business owner who has correctly structured their business) to forego part of your salary or wages in return for your employer providing benefits of a similar value. The effect is to reduce your taxable income and hence reduce your tax bill, whilst giving you tax effective access to a variety of goods and services.
Salary sacrifice enables an employee (once again ‘You’ – in the case of a business owner who has correctly structured their business) to receive a combination of income and benefits to their tax. Effective salary sacrifice allows employees to take some of their remuneration in the form of concessionally taxed benefits instead of taking it all as fully assessable salary. This process gets its name due to the employee sacrificing some part of their salary in return for the desired benefits.
If you make super contributions through a salary sacrifice agreement, these contributions are taxed in the super fund at a maximum rate of 15%, instead of you paying tax at your marginal rate.
Let’s say you are drawing $90,000 from your business as a salary. If the business still has a profit of $20,000 to allocate to you then the tax on that profit would be $6,900 (including 2% Medicare levy).
However, if the $20,000 was contributed to your superannuation fund instead then the tax on that $20,000 would only be $3,000 – saving you an additional $3,900 in tax!
Before you sacrifice some of your salary to super (if you are not ‘wearing the hat’ of the employee and employer like most small business owners) make sure your employer will continue to calculate your super guarantee payments on your gross income, before salary sacrifice. It is best to get this agreement in writing.
When you salary sacrifice, your employer is entitled to calculate super contributions on your reduced salary, however, many employers will still calculate super contributions on your original gross salary.
Because you choose the amount you salary sacrifice, it doesn’t have to cost you much now. But with a possible 30 years of earning ahead of you, you can see how it can really add up. This is especially important for women, who on average retire with around half as much super as men.
Salary sacrificing into super can save tax and really boost your retirement nest egg. But make sure you know all the rules and have considered your options before you dive in.
If you would like to have a chat about salary sacrifice or superannuation give us a call today. We can help you make informed decisions about your super over a ‘barista-style’ coffee or gourmet tea!
General advice disclaimer
The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
Only financial planning advice provided by Ceebeks Financial Solutions is associated with Avana Financial Solutions.
Christopher Beks (Authorised Representative no. 231937) is a director of Ceebeks Financial Solutions (Authorised Representative no. 344518) and an Authorised Representative of Avana Financial Solutions Pty Ltd AFSL 516325 and is authorised to provide personal financial advice.