7. Salary sacrifice vs after-tax contributions
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
- After-tax contributions
Salary Sacrifice
What is it?
Making concessional 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.
How much can I contribute?
You may contribute up to $50,000 per annum. If you are aged 50 or over a limit of $100,000 will apply to you until the 2011/12 financial year.
If you turn 50 before 30 June 2012, you will also be able to access the higher limit from the year of your 50th birthday until 2011/12.
It will be up to you to monitor your contributions and ensure the limit is not exceeded. Contributions above the new limits will be taxed at 46.5%.
Why salary sacrifice?
Salary sacrifice reduces your taxable income, so you pay less income tax. Only 15% tax will be deducted by the super fund instead of the rate you pay on income, which can be up to 46.5% (plus the Medicare levy).
The tax rate on the investment growth your super earns is also a maximum of 15%1. This can be much lower than investments outside superannuation.
The compulsory 9% 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 our example below to see the benefits.
Example
Sam’s salary is $80,000. If he sacrifices $5,000 to super, he will pay $750 contributions tax instead of $2,075 income tax, giving him $1,325 more to invest.
| With salary sacrifice | Without salary sacrifice | |
|---|---|---|
| Gross salary | $80,000 | $80,000 |
| Salary sacrifice | $5,000 | $0 |
| Income tax* | $18,975 | $21,050 |
| Contributions tax | $750 | $0 |
| Net benefit (take home pay + salary sacrifice) | $60,275 | $58,950 |
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 scheme2. 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. In fact, you can increase the amount you receive due to the reduction in your assessable income. The lower your assessable income is, the higher the maximum co-contribution you may receive gets. For example, if your total income is $50,000 your maximum co-contribution is $400. If you salary sacrifice $5,000 and reduce your income to $45,000, your maximum co-contribution will increase to $650. To receive this co-contribution you would need to make a personal after-tax contribution of $434. The co-contribution reduces to zero if you earn more than $58,000.
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 human resources department will be able to tell you how your employer will calculate their contribution.
After-tax contributions
What are they?
After-tax (non-concessional) contributions are deducted from your salary after your income tax has been calculated. 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 $150,000 per financial year. However, to accommodate larger contributions, people under age 65 will be allowed to bring forward two years of contributions. For example, a person under age 65 will be able to make up to $450,000 of contributions in the 2007-08 financial year but will then be unable to make further non-concessional contributions until the 2010-11 financial year.
Why after-tax contributions?
If your total assessable income is lower than $58,000 per year, making after-tax contributions may qualify you for a co-contribution from the Government of up to $1,5003.
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. 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 with the rest of your salary before entering your super account. Your marginal tax rate could be up to 46.5% including Medicare levy.
Any after-tax contributions made over the contribution limit will be taxed at the top Marginal Tax Rate (plus the Medicare levy).
Make additional voluntary contributions today
To make one off voluntary after-tax contributions to your super download Your Additional Voluntary Contributions Form. |
If you would like to make regular voluntary contributions to your super, log in to SuperSolution to download a Your Contributions Form. |
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Alternatively, you can call our Helpline on 1800 555 667.
1 The investment return we publish is already net of tax.2 You can read more about co-contributions in our ‘Super Co-contribution’ fact sheet
3 You can read more about co-contributions in our ‘Super Co-contribution’ fact sheet.
Issued by Total Risk Management Pty Ltd ABN 62 008 644 353, AFSL 238790, RSE L0000260, (“TRM”). This document provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. The information has been compiled from sources considered to be reliable, but is not guaranteed. Any examples have been included for demonstrational purposes only and should not be relied upon for the purpose of making an investment decision. Past performance is not a reliable indicator of future performance. An invitation to apply to join the Russell SuperSolution Master Trust is made by TRM in a Product Disclosure Statement (“PDS”). Any potential investor should consider the latest PDS in deciding whether to acquire, or to continue to hold, an investment in Russell SuperSolution. The PDS is currently available by phoning 1800 555 667 or by visiting www.russell.com.au. TRM is part of the Russell Investment Group (“Russell”). Russell or its associates, officers or employees may have interests in the financial products referred to in this document by acting in various roles including broker or adviser, and may receive fees, brokerage or commissions for acting in these capacities. In addition, Russell or its associates, officers or employees may buy or sell the financial products as principal or agent.