A guide to salary sacrificing

Salary sacrificing (making before-tax super contributions) is a popular strategy for employees on middle-to-high incomes, as it can help increase a person’s superannuation balance while reducing the amount of income tax payable (up to 49 per cent including Medicare levy) on salary or wages.

However, before embarking on a salary sacrifice arrangement, individuals should consider the tax implications involved to ensure they don’t lose out financially.

Under a superannuation salary sacrifice arrangement, an employer can make additional super contributions when their employee arranges for some of their pre-tax salary to be paid into their super fund. The employee’s salary (for tax purposes) is then reduced while the additional contributions are treated as employer contributions. A salary sacrifice arrangement can only relate to future salary, not past earnings.

Super contributions made under a salary sacrifice arrangement are treated as concessional contributions, and must be counted towards a person’s concessional contributions cap.

For the 2016/2017, the concessional cap is $30,000 for those who are 48 years or younger on 30 June 2016 and $35,000 for those who are 49 years or older on 30 June 2016.

Since salary sacrificing is a voluntary arrangement between an employee and employer, employers do not have to put such an arrangement in place. However, when an employer refuses to allow an employee to salary sacrifice super contributions, they must still pay compulsory Superannuation Guarantee (SG) contributions on the employee’s behalf.

For the 2016/2017 year, employers must pay the equivalent of 9.5 per cent of an employee’s salary into a super fund under the SG laws.

Under those same rules, an employer can cut an employee’s SG entitlements when they have reduced their taxable salary through a salary sacrificing arrangement. When an employer cuts an employee’s SG entitlements after they have entered a salary sacrifice arrangement, the employee’s total salary package is also cut, unless the employee has a written contract specifying a total amount.