An article in the Australian Financial Review’s ‘Smart Money’ section in October discussed the merits of salary sacrificing super. Summerhill’s Caroline Bell was quoted.

Salary sacrificing is not for everyone. Indeed, there are some who shouldn’t do it.  “Salary sacrificing,” says Summerhill Financial Services’ Principal and ¬Representative Caroline Bell, “is ideal for those who are somewhat established in their careers, through to those who are not going to retire in the next 5 years.
“This means, young people just starting out in their careers, and those who are very close to retiring, wouldn’t necessarily gain the overall benefits that salary sacrificing offers.”

The reasons for that, says Caroline, come down to cash flow and lifestyle.  “The potential tax advantage of any financial strategy should never be looked at in isolation — and certainly not in isolation from cash-flow needs and lifestyle aims. “So, for instance, it wouldn’t make sense for someone saving for a deposit for their first home to sacrifice great amounts into super. Yet in other situations, it could be the best thing for a family with a sole breadwinner — although, as an aside, they could also consider contributing to their spouse’s super fund.

“The point is, everyone’s circumstances are different, and there is no one-size-fits-all pronouncement on whether salary sacrificing into super is the right or wrong thing — or how much should be sacrificed.”
Firstly, talk with your employer, to see whether they offer salary sacrifice. Legally, they don’t have to, and the added administration can be a burden to small business in particular.

Your next call should be to your financial planner. If, together, you deem salary sacrifice into super is for you, then go back to your employer to talk about:

• how much: you can choose a set amount or a percentage
• whether your employer will pay their 9% super guarantee obligation on your pre or post-sacrifice amount (you can also discuss this again with your financial planner to see whether it’s still worthwhile for you to salary sacrifice)
• and ask for a form to fill in that advises your super fund which contributions are sacrificed

“Setting up a salary sacrifice arrangement can’t be done retrospectively, so either do it when you start new employment, or put in writing a new arrangement with an existing employer.”  There are limits, too, to what you can sacrifice. Firstly, your post-sacrifice salary can’t be below the minimum level specified in any relevant award or industrial agreement.  Secondly, up to certain dollar amounts (also based on age), sacrificed contributions are taxed concessionally at 15%. So while “Reasonable Benefit Limits” (a limit on monies coming out of super) were abolished, there is now a limit on monies going into super. For instance, this is $50,000 for people aged under 50. Contributions over the limit are taxed at 46.5¢, negating the benefit of sacrificing.  (For more detail, see Summerhill’s February 2007 newsletter, p2.)

“This is now something employees should watch very carefully: as from July this year, employees themselves are responsible for any tax costs arising from putting in too much — whereas pre July, employers were liable for this.”  You can also salary sacrifice any bonuses or allowances you receive from your employer.
Caroline says, “Some obvious benefits of salary sacrificing into super are that it lowers your taxable income. Plus, the additional investments in super can make salary sacrifice one of the most efficient ways to build retirement savings.  “But, as with all things financial, talk with your planner about what suits your individual goals, cash flow and lifestyle needs. Summerhill believes very strongly these 3 aspects must have equal consideration.”

Tags: salary sacrifice, Superannuation, Tax planning