Deciding how to make contributions to super can be difficult. Below we examine the benefits and limitations of salary sacrifice versus after-tax contributions to help you determine the best option for you.
Salary sacrifice: what is it?
Making contributions to super from your before- tax pay is known as salary sacrifice. The contribution is deducted from your total salary before income tax has been calculated, and forwarded to your super account.
A before-tax contribution is also called a “concessional” contribution. There is a limit to the amount of concessional contributions you can make in a financial year.
Why salary sacrifice?
Salary sacrifice reduces your taxable income, so you pay less income tax. Only 15% tax is deducted from your salary sacrifice amount to super compared to the rate you pay on your income, which can be up to 45% plus the Medicare levy. You should consider your marginal income tax rate when determining whether salary sacrifice is beneficial for you.
The tax rate on the investment growth your super earns is also a maximum of 15%.1 This can be much lower than the tax on investments outside superannuation. The compulsory superannuation guarantee contribution provided by your employer might not be enough to fund the retirement you want. Salary sacrifice can allow you to give your super the helping hand it needs to meet your retirement goals.
Take a look at the example “How salary sacrifice can save you tax” to see the benefits.
How salary sacrifice can save you tax
Sam’s salary is $85,000. If he sacrifices $5,000 to super, he will pay $750 contributions tax instead of $1,950 income tax, giving him $1,200 more to invest.
||With salary sacrifice
||Without salary sacrifice
(take home pay + salary sacrifice)
*Tax rates include Medicare Levy
How much can I contribute?
You may contribute up to $30,000 (or $35,000 if you are 50 years or over) for the 2015/16 financial year. Remember that your employer’s contributions (including any amounts they pay towards the administration costs and insurance premiums in your fund) also count towards the limit.
It is up to you to monitor your contributions and ensure the limit is not exceeded. Contributions above the limit will be taxed at your marginal tax rate, plus Medicare, plus an interest charge, and are also counted towards your after-tax (non-concessional) contribution limit. You can monitor your super by visiting our website at www.vissf.com.au. Just log in to Member Online to find up to date figures.
Things to consider
Salary sacrifice is not offered by all employers. Check with your payroll officer or Human Resources department to see if your employer allows you to salary sacrifice.
Salary sacrifice contributions are not counted towards the Government co-contribution scheme. If you only make salary sacrifice contributions you won’t be eligible to receive a co-contribution.
You may still qualify for a co-contribution by making after-tax contributions to super along with your salary sacrifice.
It is not compulsory for employers to pay superannuation guarantee contributions on income you salary sacrifice. Your employer may choose to calculate their contribution based on your income after the salary sacrifice has been deducted. This would reduce the amount that they pay to your super. Your payroll office or HR will be able to tell you how your employer will calculate their contribution.
What are they?
After-tax (non-concessional) contributions are deducted from your salary after your income tax has been deducted. You may also make one-off after-tax contributions to your account with any savings you have.
How much can I contribute?
You may contribute up to $180,000 per financial year. However, to accommodate larger contributions, people under age 65 are allowed to bring forward two years of contributions, up to a total of $540,000. For example, a person under age 65 is able to make up to $540,000 of contributions in one financial year but will then be unable to make further non- concessional contributions for the next two financial years.
Why after-tax contributions?
If your total assessable income is lower than the relevant income threshold, making after-tax contributions may qualify you for a co-contribution from the Government of up to $500.
No contributions tax is deducted from your after-tax contributions (provided you do not exceed the contribution limits). If you have a very low income your income tax rate may be lower than the 15% contributions tax deducted for salary sacrifice, so you could pay less tax by making after-tax contributions rather than salary sacrifice. This is particularly true for people who have low income and receive franked dividends from any share investments.
Things to consider
After-tax contributions are taxed at your marginal tax rate before entering your super account. Your marginal tax rate could be up to 45% plus the Medicare levy.
Any after-tax contributions made in excess of the contribution limit will be taxed at 49% on top of the income tax you have already paid.
Compare salary sacrifice and after-tax contributions online
The Moneysmart Super Contributions Optimiser can help you investigate how making contributions to super, salary sacrifice and after-tax, can affect your take-home pay and your net contribution to super.
By trying different assumptions about your annual income and the amount you want to contribute to super, the calculator can help you understand whether you’re making the most of your super contributions.
Visit www.vissf.com.au/a/super-contrib and use the Moneysmart Super Contributions Optimiser.
Discover the difference expert advice can make to your super and retirement options.
As a VISSF member, you can now access an extensive range of advice services. A qualified financial planner from our Advice Team can help you answer single questions like:
- Do I have enough money to retire?
- How much money do I need to retire?
- How long will my money last?
- Which investment option is right for me?
- Should I salary sacrifice?
- Should I consolidate my super? How?
- Do I have enough insurance cover to protect myself and my family?
You can also access simple retirement planning advice from VISSF, including advice about:
- Effective contribution strategies
- How to work less and access your super to top up your income
- How to convert your super into a regular income stream
And if you need more comprehensive financial advice, the VISSF Advice Team can arrange a face-to-face meeting with a financial planner. The first meeting is complimentary.
Call 1300 660 027 to take advantage of our new financial advice services for members.
Have any questions?
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This fact sheet is issued by the Trustee of The Victorian Independent Schools Superannuation Fund (ABN 37 024 873 660, RSE Registration number R1000436, MySuper Authorisation 37024873660599) VIS Nominees Pty Ltd (ABN 11 006 586 367 Australian Financial Services Licence number 235097. Registrable Superannuation Entity Licence number L0000321). It contains general advice only. In preparing this fact sheet, the Trustee has not taken into account your objectives, financial circumstances or needs. Before making any financial decisions, you should consider your personal circumstances and seek appropriate independent advice. The individual case study samples are for illustrative purposes only.