An excellent method of reducing tax whilst increasing your personal wealth is to consider the use of an effective salary sacrifice arrangement with your employer. By choosing to sacrifice a portion of your salary you can put more of your pre-tax earnings into superannuation up to certain contribution limits.
- As of 2014/15, your employer is legally required to pay 9.5% of your salary into your super fund, though some employers can be more generous than this.
Salary sacrificing to super can also be defined as a concessional contribution.
What Are The Benefits of Salary Sacrificing To Super?
By choosing this strategy, you really have a double benefit. If your marginal tax rate is greater than 15%, anything over and above 15% tax is extra money that goes towards your personal wealth.
In addition to this, all of the income and capital growth from your investment is taxed at a maximum of 15% within your super fund.
There are limits known as contribution caps that limit the amount of contributions that can be made, and if you go over these limits you may have to pay excess contributions tax on the amount over and above the cap.
The concessional contribution cap for the 2014-15 financial year is currently $30,000 per annum (inclusive of your employer super guarantee payment) for people aged 49 or under.
For people aged 50 or over within the 2014-15 financial year, the concessional contribution cap is set at $35,000 per annum (inclusive of your employer super guarantee payment).
If you are self-employed, you are not required to set aside money to pay for superannuation contributions, but you are still able to make concessional contributions into superannuation subject to the limits above.
These contributions are tax deductible to you.
To qualify for making concessional contributions, you need to be able to demonstrate that less than 10% or more of your annual income is made up of money earned as an employee. You must have also written to your super fund to advise them of the amount you intend to claim as a deduction.
John is currently earning $60,000pa, has no debts and is looking to use his spare cash flow to increase his retirement savings. After discussions, he suggests that he may be able to afford up to $5,000pa from his gross income in order to fund the strategy.
|Earning $60,000pa||After Salary Sacrificing|
|Net Super Contribution||$4,845||$9,095|
From the figures, we can see that by contributing $5,000pa in pre-tax dollars John is able to increase his retirement savings by $4,250 at a net cost of just $3,200.