Salary sacrifice is an arrangement where you agree to forego part of your future salary or wages in return for your employer providing benefits of a similar value.
The contractual agreement with your employer to do this is called a 'salary sacrifice arrangement'.
There are certain requirements for making a legitimate salary sacrifice arrangement. For example, you cannot make a salary sacrifice arrangement for salary or wages that you have already earned - it must apply to future income.
The ATO refers to arrangements that meet their requirements as 'effective salary sacrifice arrangements', and those that do not meet their requirements as 'ineffective salary sacrifice arrangements'.
You can sacrifice your salary or wages into a variety of benefits including:
- car fringe benefits
- expense payment fringe benefits, such as
- school fees
- child care costs
- loan repayments.
Salary sacrificing super contributions
The most common form of salary sacrifice is making additional concessional contributions (salary sacrifice) into super. This can be a really powerful way to grow your portfolio in a tax-effective way! Why?
- Salary sacrifice reduces your assessable income
The sacrificed component of your total salary package is not counted as assessable income for taxation purposes. This means that it is not subject to pay as you go (PAYG) withholding tax.
- Salary sacrifice is a reportable employer super contribution
As you influence the amount of the extra super contributions your employer makes to your super fund, any salary sacrificed amounts will be reportable employer super contributions. The reportable employer super contribution will be included on your payment summary and will affect the income tests for some tax offsets and deductions, the Medicare levy surcharge, and certain Government benefits and obligations.
- Super contributions are concessionally taxed in the fund
If you make super contributions through a salary sacrifice agreement, these contributions are taxed in the super fund at a maximum rate of 15%.
Generally, this tax rate is less than what you would pay if you did not enter into a salary sacrifice agreement and instead were taxed on this amount at your marginal tax rate.
The concessional tax treatment is limited to a set amount of contributions made each income year.
- Salary sacrifice will increase your superannuation balance
By salary sacrificing and making additional contributions above your employer contributions, you are increasing your super fund balance. This will increase your superannuation balance and may increase the chance of you retiring sooner and comfortably – a key goal of The Super Fund Co.!
What effect can salary sacrificing super contributions have?
The following table outlines an example of how salary sacrificing helped one member of The Super Fund Co. increase their super balance and save tax in 2012/13:
In this example, by salary sacrificing $11,125 in the 2012/13 financial year, our member saved $2,614 in tax, and his super balance increased by $13,739. A great outcome!
Of course, this example has been provided as a guide only, and it’s important to discuss your individual situation with your The Super Fund Co. adviser. Click here to find out more and request your own personal salary sacrifice scenario.