Should I Salary Sacrifice Into Super?

Saving for retirement is a significant financial goal for many individuals, and in Australia, superannuation serves as the primary system for accumulating these savings. One common strategy individuals consider to boost their retirement funds is salary sacrifice into super. This arrangement can offer a structured approach to increasing superannuation contributions and potentially influencing one’s tax position. Understanding the mechanics, tax implications, and broader financial effects of salary sacrifice is important for anyone considering this financial decision.

Defining Salary Sacrifice Super

Salary sacrifice superannuation, often referred to as salary packaging, is a voluntary agreement between an employee and their employer in Australia. Under this arrangement, a portion of an employee’s pre-tax salary is redirected by the employer directly into their superannuation fund, rather than being received as take-home pay. These contributions are known as “concessional contributions” within the Australian superannuation system.

A key characteristic of salary sacrifice is that it reduces an individual’s taxable income, as the sacrificed amount is not subject to regular income tax at their marginal rate. Salary sacrifice is an employer-offered arrangement, and not all employers may provide this option. The employer must still pay the mandatory Superannuation Guarantee (SG) contributions on the employee’s full salary, as if no salary sacrifice arrangement were in place.

Taxation of Salary Sacrifice Contributions

Salary sacrifice contributions, being concessional contributions, are generally taxed at a flat rate of 15% within the super fund itself. This 15% tax rate applies to most individuals and is typically lower than an individual’s marginal income tax rate. By directing a portion of pre-tax income into super, individuals can effectively reduce their assessable income, potentially leading to a lower overall income tax liability.

For high-income earners, an additional tax known as Division 293 tax may apply. This tax imposes an extra 15% on concessional contributions, effectively increasing the tax rate on these contributions to 30% for affected individuals. The Division 293 tax is triggered when an individual’s combined income and concessional super contributions exceed a specific threshold, which is $250,000 for the 2024-25 and 2025-26 financial years. Even with Division 293 tax, the combined 30% tax rate on concessional contributions can still be lower than the top marginal income tax rate, which stands at 47% (including the Medicare levy) for high earners.

Rules for Superannuation Contributions

Superannuation contributions, including those made through salary sacrifice, are subject to annual caps set by the Australian government. The concessional contributions cap limits the total amount of before-tax contributions an individual can make to their super fund each financial year without incurring additional tax. For the 2024-25 and 2025-26 financial years, this cap is $30,000. This cap includes all pre-tax contributions, such as mandatory employer Super Guarantee (SG) contributions, personal contributions for which a tax deduction is claimed, and any salary sacrifice amounts. Exceeding this cap can result in the excess contributions being included in an individual’s assessable income and taxed at their marginal rate.

For eligible individuals, the “carry-forward” concessional contributions rule allows individuals to utilize unused portions of their concessional contributions cap from previous financial years to make larger contributions in a later year. To be eligible for this, an individual’s total super balance must have been less than $500,000 at the end of the previous financial year (June 30). Unused cap amounts can be carried forward for a maximum of five years, after which they expire.

Individuals aged 67 to 74 who wish to make voluntary contributions to their super, including salary sacrifice, need to meet a “work test.” The work test requires the individual to have been gainfully employed for at least 40 hours within a consecutive 30-day period in the financial year the contribution is made. This work test does not apply to mandated employer contributions. From age 75, voluntary contributions cannot be made.

Impact on Your Overall Financial Position

Engaging in salary sacrifice super can influence various aspects of an individual’s financial situation beyond just retirement savings. Since salary sacrifice reduces an individual’s taxable income, it may affect eligibility for certain government benefits that are income-tested. This could include benefits such as Family Tax Benefit or thresholds for the Medicare Levy Surcharge.

The reduction in gross income due to salary sacrifice can also impact an individual’s borrowing capacity when applying for loans, such as home loans. Lenders assess borrowing power based on taxable income, and a lower reported income may result in a reduced borrowing limit.

Money contributed to superannuation is “preserved” until retirement age, meaning it cannot be accessed freely before certain conditions are met. In Australia, this is known as your preservation age, which is between 55 and 60 depending on your date of birth, or upon reaching age 65 regardless of retirement status. This preservation characteristic means that funds sacrificed into super are not available for immediate liquidity or unexpected expenses.