Barbara Booth* says that whether a contributor is a defined benefit superannuation scheme or an accumulation plan, salary sacrificing could bring the benefit of tax savings.
With salary sacrifice, you arrange with your employer to redirect part of your before-tax salary into super.
There’s potential for significant tax savings because this portion of your salary – up to the current annual threshold of $25,000 for concessional contributions, including any payments your employer makes through the super guarantee – is taxed at 15%.
Depending on your marginal tax rate, this can reduce your tax bill, but it’s the discipline of saving more super that has the most impact on your savings at retirement.
Any funds invested in super will also benefit from a tax-friendly environment, where low tax rates apply for capital gains and investment earnings.
Government extras for lower incomes
Even when your marginal tax rate is low, making extra payments through salary sacrifice could see you benefit from tax savings through the Low Income Super Tax Offset (LISTO).
If your taxable income for the year is less than $37,000, a refund of up to $500 of tax paid on concessional (before-tax) contributions will be included in your notice of assessment.
Salary sacrifice for defined benefit schemes
If you’re a defined benefit scheme member, you could be enjoying tax savings through salary sacrifice, depending on your employer and scheme.
As a State Government employee you may be able to salary sacrifice into your scheme and benefit.
When scheme rules show that making voluntary payments at a certain level will maximise your final scheme benefit, your salary sacrifice contributions can be ‘grandfathered’.
This means the combined contributions made by you and your employer to your defined benefits scheme will be capped at $25,000 for tax reporting, even if the actual payments made exceed this amount.
Grandfathering will only apply to some schemes under certain circumstances. Contact your scheme to check if grandfathering applies before making any changes to your super contributions.
If you’re in a Federal Government defined benefit scheme, you can only make voluntary payments into your scheme as an after-tax contribution.
You can choose to make a before-tax payment to a separate super accumulation fund to make the most of both your super savings and tax concessions.
Just bear in mind that your total concessional contributions cap is $25,000 in each financial year for every super fund you pay into, including the reported contribution from your employer into your defined benefit scheme.
What to bear in mind
For anyone planning to top-up super with salary sacrifice contributions, it’s important to think about the impact on your cash flow, now and in the future.
Although the money is yours, you won’t have access to it until your preservation age – or age 55 for some defined benefit schemes.
If you’re on a lower income, consider making even small voluntary contributions if your budget allows, so you can benefit from the government tax rebate.
If you can afford extra payments into super, make sure you check the rules relating to salary sacrifice contributions for your particular defined benefit scheme.
If after-tax payments are your only option for maximising your defined scheme benefit, this is still an important opportunity to look into, so that you can get as much income as possible from the scheme when you retire.
You can also look into making payments through salary sacrifice into an accumulation super fund, providing your total concessional contributions stay within the $25,000 annual cap
Take the next step
With the right help, planning for your retirement is easier than you think. For more expert tips, visit the StatePlus website at this PS News link.
* Barbara Booth is a registered financial adviser with StatePlus and can be contacted at [email protected].
StatePlus, formerly known as State Super Financial Services, is one of Australia’s leading providers of financial planning. Since 1990, our retirement experts have provided life changing financial advice to public sector employees and their families. With a StatePlus planner by your side, you can feel confident about reaching your financial goals to live the retirement you really want.
This article was published in August 2018. The information in this article is current at the time of writing the article. This is general information only and does not take into account your personal objectives, financial situation or needs. It is important to seek financial and taxation advice that takes into account your personal objectives, financial situation and needs before making any decisions based on this information.
