The maximum concessional (or tax deductible) contributions an eligible individual can make each year without breaching the cap amount is $25,000. Many salary or wage earners will not reach this level.
Salary sacrificing additional superannuation contributions offers individuals a tax effective strategy of increasing their retirement savings. Despite the availability of information regarding this arrangement, many issues persist; general misinformation and confusion continue to cause issues for both employees and employers. Therefore, it is vital that both these parties understand this arrangement and their potential responsibilities before entering into a salary sacrifice agreement.
Salary sacrificing, or salary packaging, is an arrangement facilitated by an employer and employee; the employee forgoes a portion of their current earnings and requests the employer to contribute the gross amount into their choice of complying superannuation fund. These sacrificed contributions are concessionally taxed at 15% in the fund as opposed to a higher tax rate if the amount is paid to the employee as wages which are taxed at their marginal tax rate.
From 1 January 2020, an employer is not permitted to reduce their liability for Superannuation Guarantee contributions to the lower gross wages or to use the salary sacrificed contributions to meet their Superannuation Guarantee Obligations.
If an employer is not willing to facilitate this arrangement for an employee, there is now the option for an individual to make additional personal superannuation contributions out of their after tax income that can be treated as a tax deductible expense when lodging their annual tax return. These contributions will still be taxed at 15% in the superannuation fund. The tax withheld by the employer on the amount contributed will then be refunded by the ATO when the tax assessment is issued. This achieves the same result as salary sacrificing in the end but there is the delay in receiving the benefit of the tax refunded.
An added benefit of these arrangements is that the individual will be increasing their retirement nest-egg as any future earnings within the Fund are also taxed at 15% whereas investment earnings outside the superannuation environment will be taxed at the individual’s higher marginal tax rates.
The suitability of these arrangements for an individual depends on their financial situation and cash flow. In general, superannuation benefits are locked away until the individual reaches their preservation age and/or until a condition of release is met.
Any individual seeking to enter into these types of arrangements should consult their accountant and/or financial adviser to fully understand the financial implications for them. If entering into a salary sacrificing arrangement, it is vital to exercise diligence in ensuring the employer is calculating income tax withholding on the reduced salary, not the original gross salary. At the same time, the employer’s superannuation guarantee obligations are to pay the minimum 9.5% superannuation contributions on the original gross wages and not the reduced amount after the additional salary sacrificed superannuation.
If you would like to know more about increasing your superannuation contributions, contact the team at MRG Redshaw today on (07) 3221 4004 or email@example.com
General Advice Warning – The information in this article is educational and general in nature. It does not take into consideration your personal financial or taxation information, goals and objectives. Please ensure you seek appropriate financial and taxation advice.
Liability Limited by a scheme approved under Professional Standards Legislation