Salary Sacrificing Super and Tax Implications

Does anybody know how tax works for this? I understand that there is a 15 percent tax on salary sacrificed super (up to the eligible threshold).

However, what I am unsure of is how/when this tax is taken out? Is it transferred to our super account and then taken out of the super account as (15%) tax? Is it taken out of our pay before the transfer to our super account? Or is it something retrospectively managed by the ATO when we do our tax return?

I am really unsure, but I want to be careful in case it is the last one.

Comments

  • +9 votes

    Is it transferred to our super account and then taken out of the super account as (15%) tax?

    That.

  • +10 votes

    Easy.

    Let's keep the maths simple.

    Your gross salary is $100,000 (plus compulsory superannuation and anything else).

    Your marginal tax rate is 37%, plus Medicare levy of 2%, on the last $10,000 so on this money you would be paying tax of $3,900, so the net pay on this part of $6,100.

    You choose to salary sacrifice this $10,000 into super, the result of which is you "don't earn" the above $10,000 so far as your tax is concerned as it's gone to super so you don't pay the tax on it. Instead, the super fund takes $1,500 of it on entry for a net contribution of $8,500.

    Therefore, you've "saved" $2,400 in tax by putting it into super instead of taking it as cash. The obvious trade off is that money is then "locked" into super until you meet a condition of release.

    Ignoring a series of other factors (including ensuring you don't exceed to concessional contributions cap, and are not liable for s293 tax), that's it. The tax is taken care of through the above mechanisms and there is no tax bill at return time.

    •  

      That's awesome. It also makes me think I could try to get below the tax threshold (i.e. under 90k a year) :)

      • +3 votes

        Keep in mind that your can't salary sacrifice your way out of paying the Medicare Levy Surchage or HECS repayments for example, so make sure you keep that in mind.

        MLS and HECS are based off your grossed up income - taxable income + fringe tax benefits + salary sacrificed super contributions to that effect

      • +3 votes

        Be aware there is also a limit of $25K concessional contributions per year. If you exceed that they tax you like crazy.

      •  

        tax threshold moved to 120k too this year

        •  

          Since when?

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          •  

            @Joshaz: They brought it forward at the end of last year and back dated it to July 1 as part of the "covid recovery" so it's essentially this whole financial year.

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              @whitelie: Quite right, I referred to the previous year's tables. Maths above still the same although adjust from 37% to 32.5% if using $100k as the salary base so savings would be $450 less at this level.

  • +1 vote

    Look at your super statement. All pre-tax contributions will first need to pay 15% super, and the balance is added to your super fund. If you contribute $100, $85 will be added to your balance and $15 will be remitted by the super fund to the ATO as tax on the contribution. If you contribute above the concessional cap, higher tax would be charged (I think the highest tax rate). You also don’t pay Medicare levy on the super contributions, that is another 2% saved.

    •  

      Thanks for your response and advice.

      So I understand you've answered by question by confirming that the (hypothetical) $15 is sent by the super fund, which means I do not have to do anything? Not even anything for it in my tax return?

      That's awesome regarding not paying that on the Medicare levy. Crikey, I should have spoke to an accountant years ago.

      • +1 vote

        Yes, you don't have to do anything. Although, remember there are restrictions on when and how you can access your super. I hope that you have researched that superannuation is the right choice for you. For example, if you are young, you will have to wait until you are 60 before you can access funds in your super.

  • +2 votes

    If you have hecs debt, keep in mind the amount of hecs repayment remains unchanged, but your employer may withhold less tax from you from each pay (because your taxable income is less), and you will have to cover the delta at tax return. Some people have elected to withhold additional tax from each pay to compensate for that. If this is applicable to you, happy to elaborate more.

    •  

      That's really useful to know. Fortunately I finished paying my HECS a few financial years ago.

  •  

    i am sacrificing 10% on top of my employer contribution of 10%. So, 20% into Super. Plus another few hundred after tax contribution. My super is very low.

    • +1 vote

      I salary sacrifice 5% which my employer then matches, so also 20% in to super. You should see your balance grow pretty quickly doing this, I know mine did when I started doing it.

      •  

        Thats the idea. Just moved here to land downunder and my super has just started.

  • +1 vote

    Salary sacrificing super is pretty redundant now.

    There used to be restrictions on claiming a personal super contribution in your tax return for employees, but these have mostly been removed.

    Regular employees can now contribute to super with their post-tax income and claim a tax deduction.

    The tax effect is the same as salary-sacrificing, you just need to deal directly with the superfund, rather than the HR department of your employer.

    •  

      Tax effect is the same but super balance is not.

      When you salary sacrifice, the 15% tax is deducted and rest is invested in super. With voluntary post-tax contributions, you first pay tax at your marginal tax rate, and then invest the rest in Super. You could be waiting from a max of 15 to a minimum of 2 months to reclaim that tax refund which would have been better invested in the super for that period. So you lose on opportunity cost of that tax refund.

      Secondly, some companies match for the salary sacrifice. My company offers that perk but I did not find out until I asked for Salary sacrificing arrangement.

      •  

        The super fund will adjust the tax as soon as the form 290 is lodged so I don't agree that you are missing out in any way. Technically by putting in an after tax contribution to start with there is more money sitting in super to be invested as no tax is deducted when the money goes into the account.

        So salary sacrifice or putting in a voluntary contribution and claiming the deduction are effectively the same thing as far as superannuation is concerned. But yes if your employer 'matches' salary sacrifice in any way then it is better to organise it via your employer.

        It's the adjustment of your taxable income that comes with the tax return at a later stage - receiving the difference between the super and marginal tax rate - that occurs later which is outside of your super.

        •  

          Let me see if I understand it correctly.

          You will be doing post-tax super contribution every pay-cycle (fortnightly) and filing form 290 every pay cycle?

          •  

            @nahkk: You have the option if doing it via the employer or yourself. Most people who lodge a form 290 do a lump sum contribution. The form can either be lodged in the same financial year or the next financial year before your tax return is lodged, so you could wait to lodge the form.

        •  

          Technically by putting in an after tax contribution to start with there is more money sitting in super to be invested as no tax is deducted when the money goes into the account.

          But you have paid the marginal tax rate already on that amount (e.g. 37%). Compare it to salary sacrificing the same amount where you would have paid only 15% assuming it is within concessional threshold. This means that by doing post-tax contribution, the actual money that goes into super is (37-15) 22% lesser.

          E.g.

          $100 salary sacrificed ends up as $85 in super.

          If you do not sacrifice that $100 and make a voluntary contribution post tax then you only receive $63 after tax. The remaining $22 will be refunded by ATO at the end of fiscal year.

          •  

            @nahkk: I'm purely discussing what occurs inside of super, not missing out on a lower income tax rate which has occurred outside of super.

    •  

      True in some, maybe most cases. However my employer provides an additional 1% super if I sacrifice minimum 10%.

      Extra $1k plus per year, thank you very much. (In addition to the fairly significant tax savings)

  •  

    possible pro tip. check when your super does the tax deductions.

    i.e. if it is the end of every quarter, do your sacrifice via pay the day after that, that way you can get to hold your 15% extra for a full 3 months. Might only make a slight diff but better than nothing (hoping it goes up)

    can also sacrifice in June, and have it go into your super fund in July if you have already exhausted this years caps (careful timing needed)

    •  

      Thanks for the tip. But has this changed with the new STP regime. Isn't now the tax has to be remitted more often, at least for the employers.

      • +1 vote

        not sure, mines comes out every 3 months, last time i checked.

  • +1 vote

    The contributions an employer puts into your super as classified as before tax, so the super fund is responsible for taxing it. Depending on the super fund you are in - some deduct the tax straight away, others don't tax it until funds are moved. This is assuming you are asking your employer to put in salary sacrifice on your behalf.

    If you do it yourself by lodging a form 290 (ATO form) after contributing yourself, the fund will subtract the tax at the time of processing. You need to include the confirmation letter in your tax return to balance out the tax you already paid as part of your tax return. This is because the money you put in yourself would have been after tax.

    Hope this helps.