A little known change to Super that can go a long way for your retirement strategy
Simply put, salary sacrifice into super is making additional contributions to boost your retirement nest egg whilst minimising your tax as you go. Here’s a little-known change to the law that can potentially go a long way for your retirement strategy.
Why salary sacrifice?
There are a number of items which can be salary sacrificed as part of an employment arrangement, however one of the simplest (if not the simplest) of these items is to salary sacrifice into your super account.
Like the good old saying goes, “you don’t miss what you don’t have.” The same could be said about using an effective salary sacrifice arrangement. Basically, this means you won’t miss the after-tax cash from your salary sacrifice arrangement when the money is taken out of your pay and at the same time you know that this extra super contribution is taken from your pay (pre-tax) and put into your super fund at a flat tax rate of 15%.
What are the benefits?
By regularly salary sacrificing, you can top up your super gradually throughout the year from your pre-tax salary. You avoid the “painful” deduction from your bank account in a large amount that generally occurs with personal contributions. Once again reiterating “out of sight, out of mind”.
The benefit of this can be two-fold - not only do you boost your super by making additional contributions, but also your taxable income is reduced by the amount you sacrifice to super. This generally results in a lower annual personal tax bill and fits well with the plan to make the most of your hard-earned income during your working life whilst preparing for the future at the same time.
Recent changes to super legislation allow an individual to make a personal contribution and claim the deduction at tax time up to a total maximum contribution cap of $25,000. However, by salary sacrificing the tax benefit is immediate rather than waiting until a tax return is lodged, and the paperwork required is less as well!
The changes explained
Since 1 July 2017, the concessional (tax deductible) contributions cap is $25,000 per annum for everyone. Therefore, the maximum amount your employer can pay to super for you (including salary sacrifice amounts) is $25,000pa.
However, from 1 July 2018 you are able to 'carry-forward' any unused concessional contributions from the $25,000 cap from previous years, provided your Total Superannuation Balance (TSB) is less than $500,000. This means that if you don’t use the full amount of your concessional contribution cap in one year, you can carry-forward the unused amount and take advantage of it at any time up to five years later.
Peter is aged 40 and his current annual salary is $100,000. His TSB is $300,000.
In 2018/19, the total concessional contribution made into his super account is $9,500. This means in 2019/20, Peter can have concessional contributions of up to $40,500 made into his super account.
The $40,500 consists of his standard annual $25,000 concessional contribution cap plus $15,500, which is the unused concessional contribution amount from 2018/19 carried forward ($25,000 – $9,500 = $15,500).
The entire $40,500 in concessional contributions will be taxed at 15% in the super fund.
Why is this new strategy not used more broadly?
Most individuals try to minimise their tax position within the legislative guidelines, but the same individuals may be reluctant to make additional contributions to super to achieve the same. This is often because monies contributed to super could be locked away for a long time as super can only be accessed upon meeting a condition of release (usually retirement, post age 60 or turning 65). Whilst this is certainly a consideration, in the modern age of a reduced annual concessional contribution cap ($25,000 per annum), the earlier and more regularly super contributions are made, the better the retirement outcome that is likely to be achieved.
As stated often, superannuation for many Australians will be your second-largest (if not your largest) financial asset behind your home. Therefore, careful planning with a long-term view should boost your retirement nest egg and help secure your financial future for retirement – the Simple Super Strategy of Salary Sacrifice could be an effective tool in this planning.
How do I get started?
Generally, all you need to do is to ask your employer (via relevant paperwork) to direct a portion of your salary (pre-tax) to your super fund rather than pay this as salary (less tax at your marginal tax rate) to you. It is as simple as that!