Weighing up salary sacriﬁce vs. after-tax contributions
Few Australians will achieve a comfortable retirement relying solely on superannuation funded by compulsory employer contributions.
By making your own voluntary contributions, you can help build your retirement nest egg in a tax-advantaged environment. Remember, super investment earnings are taxed at a maximum of 15%, a lot lower than most people’s marginal tax rate.
Knowing how to make your own contributions can be tricky – through salary sacrifice or via after-tax contributions? Here we explore the options.
|Contribution type||Salary sacriﬁce||After tax|
• You arrange with your employer on an ongoing basis to take less pay home and have the difference put directly into your super
• You contribute from your own money either regularly or sporadically. It’s easy using the BPAY® number you were given on joining VISSF – or ask for it by contacting our Client Services Team.
• You get more super working for you, because it is taxed at just 15% contributions tax, not marginal tax rates (see Tim’s story below)
• You can determine how regularly you contribute
|Might suit who?||
• Particularly those earning over $37,000
• Low income earners entitled to the government co-contribution
If you’re not sure which approach suits your needs, try out the interactive super contributions optimiser tool at moneysmart.gov.au/tools-and-resources/calculatorsand-tools/super-contributions-optimiser – or ask a ﬁnancial adviser.
Important note: The Government places limits on how much individuals can contribute to super each year, without tax penalties. You should make sure your super stays within the caps – see vissf.com.au/contributing-to-super.
If Tim sacriﬁces $5,000 to super from his $85,000 salary, he will pay $750 contributions tax instead of $1,925 income tax, giving him $1,200 more to invest.
|With salary sacrifice||Without salary sacrifice|
|Income tax (including Medicare levy)||$19,147||$21,097|
|Net beneﬁt (take home pay plus salary sacriﬁce)||$65,103||$63,903|
Q. I made some after-tax contributions to my super account. Does this mean I’ll get a government co-contribution?
A. It depends on your annual income. In 2014/15 the maximum government co-contribution value is $500 for a $1,000 personal contribution. This amount decreases on a sliding scale for those on incomes above $34,488 and ceases for incomes of $49,488 or more.
If you are entitled, you don’t need to do anything. As long as we have your Tax File Number, the Australian Tax Ofﬁce will pay it to your VISSF super account automatically.
This article was taken from the Spring 2014 edition of VISSF Super Views:
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Image Source: John Fischer (edited), Creative Commons 2.0