Salary Sacrifice is an agreement where you forgo part of your future income in return for your employer providing benefits of a similar value – in this case, super contributions. This is a popular strategy for individuals on middle-to-high incomes. The main advantages of this strategy are a reduction in the tax payable on personal income – which can be as much as up to 46.5% – and an increase in your superannuation balance.
A superannuation salary sacrifice agreement is an agreement between you and your employer whereby, a portion of your pre-tax salary is paid into your SMSF. This reduces the tax payable on your personal income and the amount paid into your SMSF is treated as employer contributions (concessional contributions). As the benefits are concessional contributions, you will not pay income tax on them, except for 15% tax to be paid by the SMSF.
However, there are limitations that you need to consider when you make salary sacrifice contributions toward your SMSF. One of these is that if the concessional contributions cap is exceeded, the SMSF will be liable to pay an excess contributions tax. For more info on the limitations on salary sacrifice, please click here.
When a superannuation salary sacrifice agreement is made, any super contributions that are contributed to your SMSF will be treated as concessional contributions (before-tax contributions). These contributions will be counted toward the contribution caps for concessional contribution in the Financial Year in which the contributions are made.
From 1 July 2017 to 30 June 2021, the concessional contribution cap for each year is $25,000. The concessional contribution cap is increased to $27,500 from 1 July 2021 regardless the age of individuals.
Note: Work test rules apply for Australians aged 65 and over, and voluntary contributions are not permitted for Australians aged 75 and over.
Individuals who earn less than $37,000 a year for the Financial Year 2012/2013 may be entitled to a refund on their contributions tax.
The applied tax rate on concessional contributions (salary sacrifice and SGC) for individuals who earn more than $300,000 from 1 July 2012, will be increased from 15% to30%. This is referred to as the high income tax or the Div 293 tax.