Salary sacrifice into superannuation is when you offset a specific sum of your salary that’s directly deposited into your superannuation fund. Higher income earners often enjoy this option, if permitted by their employers, because they will be able to enter into a lower tax bracket.
For example, if you make $80,000 per year, you can contribute $20,000 to your SMSF. By contributing $20,000, you are essentially receiving a new salary of $60,000. Since you are earning less because you are sacrificing $20,000, you can pay less tax on your new income. The $20,000 that is to be placed in your super fund will be taxed at a lower rate of about 15 per cent.
Although taxes are taken out of your contribution, you still end up earning more in the long run, so if you spent that $20,000 from your regular salary on other things, you would still have to pay the contributions tax along with paying taxes on your $80,000 of salary, rather than your new salary of $60,000. In the long run, this makes a huge difference.
You will have to arrange the details with your employer as this choice could affect your employer as well. Remember, your employer will also contribute to your superannuation, so you do not want your salary sacrificing to interfere with the amount your company is ready to contribute to you.
Since salary sacrifice is considered to be part of the employer’s contribution, your employer may have the right to 9 per cent of contribution through the super guarantee, unless otherwise noted upon. You can negotiate with your employer so that everything is agreeable for both parties. If not, the employer may be able to decrease their contributions or pay a smaller contribution due to your “new” salary. This can all be worked out through negotiations with your employer.
In order to avoid being in the highest marginal tax brackets and paying a Medicare levy, you will need to steer clear of excessive contributions since there is a cap on how much you are allowed to contribute through salary sacrifice – the normal figure for the cap is around $25,000. For people who are over the age of 50, the cap is as much as $50,000.