Sacrificing salary as a super contribution

Superannuation strategies for SMSF trustees.

Salary sacrifice is a superannuation strategy that has been around for years. This strategy is all about redirecting pre-tax salary or wages into superannuation instead of paying tax then making a super contribution.

It really works best when the tax payable on the income sacrificed is more than the Medicare levy inclusive lowest tax rate of 21 per cent. This is because tax paid by a super fund on contributions is 15 per cent. Before the marginal tax rate was increased from 15 per cent to 19 per cent the only benefit was a saving of the then 1.5 per cent Medicare levy.

In addition a person is disadvantaged if their income is below the tax payable threshold. For the 2017 year this is $18,200 and, when the low income tax offset of $445 is taken into account no tax is paid on income up to $20,542.

Steps to Implement Strategy

1.     

Contact your employer to see if they allow you to sacrifice some of the salary as extra superannuation.

2.     

If they say yes, ask how much they are contributing as superannuation guarantee contributions.

3.     

Calculate how much you can afford to give up of your take-home salary and request your employer to salary sacrifice the equivalent pre-tax salary amount. This will depend on the marginal rate of tax that applies to salary being sacrificed.

4.     

Make sure that the amount being sacrificed, when combined with the amount being contributed as SGC by your employer, does not exceed the maximum concessional contribution limit.

Documentation Required

The only documentation that applies to this strategy will be dictated by trust deed of the SMSF. The trust deed might stipulate that documentation must be completed so that employer contributions can be accepted from an employer contributor to the fund. Any other documentation required will be what is required by the employer before salary can be sacrificed as extra super contributions.

Warning One

With the maximum concessional super contributions reducing to $25,000 for everybody, care must be taken to make sure that the amount of salary sacrificed as extra super contributions does not exceed the $25,000 limit

Warning Two

There are some employers that reduce the amount of SGC they contribute when an employee salary sacrifices. Although this is mean and underhanded it is legal. If you are thinking of salary sacrificing check with your employer first to make sure your SGC contribution will not be reduced.

Before using this strategy you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.


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