Salary sacrifice arrangements (SSAs) are an effective strategy for employees seeking to optimise their financial planning, particularly concerning superannuation contributions and tax liabilities. This article will help you understand what salary sacrifice is, how it can benefit you, and important considerations to keep in mind.

What is a Salary Sacrifice Arrangement?

A salary sacrifice arrangement involves an agreement between you and your employer where you forgo a portion of your future salary in exchange for benefits, such as increased superannuation contributions. This means that instead of receiving part of your salary in cash, that amount is contributed to your super fund or provided as fringe benefits.

Benefits of Salary Sacrifice

1. Tax Efficiency: One of the main advantages of salary sacrificing is its tax efficiency. Contributions made through salary sacrifice are taxed at a lower rate (up to 15%) instead of your marginal tax rate. This can result in substantial tax savings.

2. Boost Your Super: Salary sacrificing allows you to significantly increase your superannuation savings, ensuring a more comfortable retirement.

3. Flexible Financial Planning: This arrangement provides flexibility in managing your taxable income and can be tailored to suit your personal financial goals and circumstances.

How Does Salary Sacrifice Work?

To implement a salary sacrifice arrangement, you need to agree with your employer in writing to sacrifice a portion of your future income. Here are a couple of examples to illustrate effective salary sacrifice arrangements:

• Annual Agreement: At the beginning of the financial year, you agree to forgo $100 from your salary every fortnight. In return, your employer contributes $100 per fortnight to your super fund.

• Bonus Sacrifice: Before being informed of the total bonus amount, you elect to sacrifice 80% of a discretionary bonus in exchange for additional super contributions.

In both scenarios, the sacrificed amount is taxed at a lower rate when contributed to your super fund, and your employer can claim a tax deduction for these contributions.

Ineffective Salary Sacrifice Arrangements

For a salary sacrifice arrangement to be effective, it must apply to future earnings. Here are examples of ineffective arrangements:

• Already Earned Salary: Attempting to sacrifice salary that you have already earned is ineffective. The contribution would be taxed at your marginal rate and count towards your non-concessional cap.

• Post-Decision Bonus: Sacrificing a bonus after the amount and payment date have been advised is also ineffective.

• Leave Entitlements: Sacrificing annual or long service leave entitlements payable due to employment termination does not qualify.

Important Considerations

When considering a salary sacrifice arrangement, it’s essential to keep several factors in mind:

1. Tax-Free Threshold: Ensure you don’t reduce your taxable income below the effective tax-free threshold, as this could result in paying more tax overall.

2. Preservation Rules: Salary sacrificed amounts are subject to superannuation preservation rules, meaning they cannot be accessed until you meet a condition of release.

3. Division 293 Tax: High-income earners might be subject to an additional 15% tax on concessional contributions if their income exceeds $250,000.

4. Low Income Superannuation Tax Offset: Low-income earners making concessional contributions may be eligible for a government tax offset of up to $500.

5. Employer Restrictions: Not all employers permit salary sacrifice arrangements, and some may limit the amount that can be sacrificed.

6. Concessional Contributions Cap: Total concessional contributions (including salary sacrifice) are capped annually, and exceeding this cap could result in additional taxes.

7. Ordinary Time Earnings Base: Employers must calculate super contributions based on your ordinary time earnings, including sacrificed amounts. They cannot use salary sacrifice to meet their super guarantee obligations.

8. Impact on Other Benefits: Employers might base other benefits, like termination payments, on your salary after salary sacrifice. This can affect the overall value of these benefits.

9. Reportable Employer Super Contributions: Salary sacrifice contributions are considered reportable employer super contributions and are included in various income tests for super, tax, and government benefits.

Is Salary Sacrifice Right for You?

Salary sacrifice can be a valuable tool for many individuals, including:

• Employees with High Taxable Income: If you have a high taxable income, salary sacrifice can reduce your tax liability.

• Those with Surplus Cash Flow: If you have extra cash that you don’t need immediately, sacrificing some salary can boost your super.

• Small Business Owners: If you own a small business and are employed by your company, salary sacrifice can be an effective strategy.

• Bonus Earners: Employees in industries that pay bonuses can use salary sacrifice to manage tax more effectively.

Reasons to Discuss Salary Sacrifice with Your Advisor

• Tax-Effective Contributions: Salary sacrifice can be a tax-effective way to contribute to your superannuation.

• Transition to Retirement Strategy: If you have reached your preservation age, salary sacrifice can be part of a transition to retirement strategy.

• Funding Insurance Premiums: You can use salary sacrifice to fund insurance premiums within your super fund tax-effectively.

Salary sacrifice arrangements offer a strategic approach to managing your income, taxes, and superannuation savings. By understanding how SSAs work and considering the associated benefits and factors, you can make informed decisions to enhance your financial future. At Vista Financial Group, we are here to guide you through the complexities of salary sacrifice arrangements and help you achieve your financial goals. If you have any questions or would like to discuss how salary sacrifice can work for you, please get in touch with us today.

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