Salary sacrificing

Should you do it? Well I’m not really allowed to say. Because laws. But it’s more complicated than that anyway. Now that that’s out of the way, here’s what it is.

Salary sacrificed super contributions

If I was to write an article about all the different methods of salary sacrificing, you might still be reading it by the time birkenstocks finally become fashionable. Since old mate Georgey Martin is more likely to finish A Song of Ice and Fire before that happens, I’m only going to focus on salary sacrificed super contributions. I know, just reading those words is sleep-inducing, but bear with me because if you do this right, it can save you a lot of money.

In Australia, the government offers taxpayers significant tax concessions if they contribute money into their superannuation accounts, up to a cap creatively dubbed the ‘concessional contribution cap’. This cap is subject to change and for the 2018-2019 financial year, it was $25,000. The tax concessions we mentioned way back (two sentences ago) are available for the sum of: 

  • your employer’s mandatory super contributions (the ‘super guarantee’ – 9.5% of your salary); and
  • any pre-tax amounts you instruct your employer to ‘sacrifice’ into your superannuation account.

If you’re as big a tax nerd I am, you might be wondering, what’s so significant about these concessions that they warrant italics and bold font? Well, if your super contributions fall within the concessional contribution cap, they are taxed at 15% instead of whatever your marginal tax rate is (the highest tax bracket you fall into). Let’s do the maths. 

In the table below I hope to demonstrate how much better off birkenstock-sporting Tash might be if she was to make concessional salary sacrificed super contributions. In this example, we assume that Tash earns $80,000 per year (excluding super), and that once upon a time she rocked those not-so-fashionable sandals at some sort of tertiary institution (and accrued a university HECS debt from her time at said institution). We explained above that your $25,000 concessional contribution cap includes your super guarantee – which for Tash would be $7,600. In the example, we assume Tash contributes the maximum amount she can while still remaining within this concessional cap ($25,000 – $7,600 = $17,400) which is why she starts with a taxable income of $62,600 instead of $80,000. These are rough numbers for the 2018-19 financial year – please don’t butcher me if you’re a hip Big 4 graduate.

 No
contributions ($)
With concessional
contributions ($)
Taxable income80,00062,600
less income taxes17,54711,892
less medicare levy1,6001,252
less HECS repayment4,4004,400*
plus tax offset 1,0801,080
Net income57,53346,136
less taxes on
voluntary
contributions
N/A 2,610
Total taxes paid (incl HECS)22,46719,074

By making these concessional contributions, Tash saves $3,393 in taxes over the financial year. I’ve left a little asterisk in the HECS line item because your HECS liability is annoyingly calculated on your “HECS-HELP repayment” (HRI) income, rather than your taxable income. Your HRI income includes any reportable super contributions so that bumps Tash’s income back to $80,000 for the purposes of assessing her HECS liability. You might be wondering why I even bothered to address HECS in the first place if salary sacrificing doesn’t reduce your HECS liability. Well, it’s a common misconception among many young people who salary sacrifice that they can push back their HECS repayment liabilities, which makes salary sacrificing seem more valuable than it is. Don’t get me wrong, salary sacrificing is valuable, it just won’t help you put off repaying your HECS debt.

Now, I’ve just demonstrated how advantageous this is from a tax point of view. But something to keep in mind is that everyone’s personal circumstances differ. If you’re privileged enough that you can forgo the lost cash flow, then yes, unless you’re an incredible stock picker, it might make sense to be taking advantage of the concessional tax rate. For most people, it would be substantially lower than their marginal tax rates. 

However, some people may not be able to afford to forego any of their income. Disregarding the tax saving, if Tash hadn’t made any voluntary concessional contributions, her net income would have been $57,533. Because she did, it’s $46,136. That’s $11,397 of income she won’t see appear in her bank account throughout the course of the year. Obviously, this money doesn’t just disappear. Remember that Tash’s super balance is now $17,400 (less 15%) better off because of these contributions. However, plenty of people need that $11,397 to finance their livelihoods. This money is now inaccessible until retirement (bar some exceptions).

You don’t have to necessarily contribute an amount equal to the concessional contribution cap. You will still benefit from the concessional tax rate of 15% if you contribute an amount less than $25,000 over the financial year. Tash can afford to splurge on birkenstock sandals so her personal circumstances might be better than most. But if you want to contribute an amount less than the cap, that’s fine too. Finally, keep in mind that salary sacrificing becomes more appealing as your income increases, and particularly as you move up tax brackets. So, if you’ve done the maths and decided salary sacrificing isn’t for you, please don’t discount the idea altogether as it may become relevant at some point in the future.

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