Salary sacrificing is a commonly heard term amongst nurses, midwives and carers, as it relates to both their pay and their super, but what does it actually mean? How can it help, regardless of whether you are heading towards retirement or commencing your first full-time role?
According to Linda Panaszek, a Superannuation Specialist in HESTA’s South Australian office, many people can confuse salary sacrifice with other concepts like salary packaging.
“Salary packaging is where you take part of your pay pre-tax and use it to pay bills and expenses; salary sacrifice is a similar concept but you’re making a contribution into super, so it can be done in addition to salary packaging,” she says.
Ms Panaszek explains for ANMJ readers some of the key concepts of salary sacrificing, its benefits and risks, and some of the legal and tax obligations workers must follow when making superannuation decisions.
ANMJ: What is salary sacrificing?
Linda Panaszek: Salary sacrifice is basically the term used when you enter into an arrangement with your employer to forgo part of your income and contribute that into super.
What it involves is money being deducted from your pay before you’re taxed and then being contributed into super where it is taxed at 15%. So where that 15% tax rate is lower than a person’s marginal tax rate it does become a very tax effective way to save for retirement.
ANMJ: Who is legally entitled to it and are there any preconditions that people need to satisfy?
Ms Panaszek: To salary sacrifice into super, you need to be under age 75 and if you are aged 67 or more you need to meet the work test – that is work at least 40 hours in any 30 consecutive day period in the financial year.
ANMJ: How much salary are you allowed to sacrifice as a contribution to your super?
Ms Panaszek: There is an annual cap of $25,000 on the amount that can be contributed at that 15% tax rate. And this includes the normal contributions your employer makes on your behalf. So where you exceed that cap of $25,000, anything above that will get taxed at a higher amount, which is usually your marginal tax rate plus an excess contribution fee.
ANMJ: What are some of the advantages and disadvantages of salary sacrificing and how should someone weigh those things against the other?
Ms Panaszek: The key advantage of salary sacrificing is that tax saving — Between what your marginal rate of tax is (Whether you’re on the 34c, 39c or 47c tax rate) and the 15% tax that’s applied to the contribution — that goes straight to your super and it’s a direct boost to your retirement savings. Even small amounts, regularly over a long period of time, can have a very significant impact on your super balance at retirement.
Something to consider is that, generally speaking, you can’t access your super until you retire. If you are looking to make contributions to super make sure it’s money you’re not going to need in the short term as it will reduce your tax home pay. However it’s easy to stop salary sacrificing for a period of time if you need to.
ANMJ: What would someone need to know in terms of their legal and taxation obligations before salary sacrificing?
The main point to be aware of is that $25,000 cap on pre-tax contributions, but that cap includes your 9.5% [minimum] compulsory employer contributions, so if you’re looking to sacrifice up to the full $25,000 cap, you’d need to work out what your employer is putting already in on your behalf.
So if they’re putting in $10,000 a year, you can then only salary sacrifice $15,000… I’ve come across that quite frequently, where people have not taken that into consideration and then they’ve ended up with a tax bill at the end of the year.
The second thing is that from 1 July 2018, the federal government introduced a new measure where a person can carry forward any unused pre-tax contributions for a maximum of five years. So if you don’t contribute up to that full $25,000 limit in one year, you may actually be able to make up for it in future years, but this will depend on your age and super balance. It’s important to check what’s left in your cap before making extra contributions.
During the interview, Ms Panaszek mentioned that HESTA offers advice at no extra cost for its members with managing their superannuation. If you’re a member and require more information or have questions about your own circumstances, please see their website for more information. This is general information and has not taken into account your personal circumstances. You should speak to a financial adviser before making a decision. H.E.S.T. Australia Ltd ABN 66 006 818 695 AFSL No. 235249.