Whether you’ve already chosen to salary sacrifice with your employer, or are considering it – here’s the lowdown.
What is salary sacrificing?
Salary sacrificing, sometimes referred to as salary packaging, is an agreement between you and your employer whereby your employer can pay for a range of goods or services in replacement for part of your wages or salary. The amount you choose to sacrifice comes out of your pre-tax salary therefore reducing your taxable income. The types of benefits include fringe benefits, exempt benefits and super.
Some fringe benefits can include cars, property such as land, buildings and bonds and expense payments such as loan repayments and school fees. With fringe benefits, the value of these will appear on your payment summary at the end of the financial year but you won’t have to pay tax on this amount. With this type of salary sacrificing, the employer pays a fringe benefit tax (FBT) for the benefits paid to an employee in place of salary or wages.
Exempt benefits can include work-related items such as computer software and devices. These benefits are exempt from the FBT.
You can also choose to salary sacrifice into your superannuation account.
Salary sacrifice into super
All of our working lives, we work towards growing our superannuation savings to see us through our retirement. There are many ways in which you can help your super, with salary sacrificing usually easy to set up.
Opting to sacrifice some of your income to go into your super account can help give your savings an extra boost. It’s good to understand how this process works to determine if it may be a strategy you may be able to implement.
How it works
It is an agreement with your employer to take a portion of your pre-tax salary and use this to make an additional concessional (before-tax) contribution to your superannuation account.
Salary sacrifice can be a tax-friendly way to grow your super. These before-tax contributions are taxed at just 15% in your super fund. By contrast, if you earn between $37,000 and $90,000 your marginal tax rate will be 32.5%.
Concessional contributions include employer contributions made under the Super Guarantee (these are based on 9.5% of your normal wage or salary) as well as your own salary sacrifice contributions. Both incur the 15% tax in your super fund.
If you do choose to salary sacrifice into your super, you will need to speak with your employer and agree to pay a portion of your pre-tax pay into your fund. Your employer isn’t obliged to go along with the arrangement.
Non-concessional, or after-tax, contributions are those contributions made into your super account with your after-tax income and there is no tax payable on these.
Depending on your income and how much you are willing to sacrifice, you may find a mix of concessional and non-concessional payments are your best option.
Super concessional caps
It’s important to remember that the super concessional caps include the 9.5% super guarantee contributions that your employer legally needs to pay as well as your salary sacrificed additional contributions. The value of both contributions combined cannot exceed $25,000 each financial year.
Pros and cons of a super salary sacrifice
The benefits of salary sacrificing into your superannuation include paying less tax (depending on your income), increasing your savings to help live the life you want once you reach retirement, and the contributions into your super fund are lightly taxed.
However, you need to remember that any salary sacrifice agreement means less take home pay. Be sure you can manage your budget on your new lower pay packet.
The other issue to weigh up is that money added to your super is normally locked away until you reach preservation age. This varies according to when you were born. As a guide, if you were born after 1 July 1964, you won’t be able to access your super until you reach age 60.
Depending on the outcome of the federal election in May 2019, it is also possible that a number of the rules around super may change, so it is best to check the rules in place at the time before making a decision to salary sacrifice.
Salary sacrificing for mortgages
Your mortgage repayments can be included in your salary sacrifice agreement, if your employer and lender offers the option. This will allow your employer to make repayments directly on your loan for an agreed amount.
Pros and cons of salary sacrificing for mortgages
The benefits of salary sacrificing your mortgage is to help lower the duration of your home loan, and the interest payable. Additionally it will reduce your taxable income.
However, similar to salary sacrificing into your super you need to remember that you will not have access to these funds and therefore need to adjust your budget accordingly.
Chat to your local FinChoice adviser today who can help you put together a plan covering a range of financial strategies, including your superannuation and financial wellbeing for retirement.