Salary sacrificing to superannuation could help to build your super in a tax-effective way.

Salary sacrificing is when an employee agrees to give up part of their salary or wages in return for benefits of a similar value. Salary or wages can be sacrificed into a variety of benefits, including car fringe benefits, expense payment fringe benefits such as school fees, child care costs, or loan payments, and of course, superannuation.

In the case of salary sacrificing to super, you forgo part of your before-tax cash salary in return for your employer making additional contributions to your super fund.

This means you can’t arrange to salary sacrifice salary, wages, or bonuses you have already earned.

The advantages and disadvantages of salary sacrificing

The advantages of salary sacrificing are:

  • You pay income tax on your reduced salary, after the sacrificed amount has been deducted from your gross salary
  • Salary sacrificed super contributions are classified as employer contributions are are taxed at 15% rather than your marginal tax rate (if you earn less than $250,000 per year including super), up to the concessional contributions cap
  • Your employer may also benefit from a reduction in payroll tax

There can be disadvantages to salary sacrificing for some, which include:

  • Your ‘take home’ pay will be reduced
  • Your contributions are classified as concessional contributions and will be subject to the caps on concessional contributions

Your employer may also be required to report benefits on your payment summary that may affect your eligibility for certain government benefits. It will also affect your HECS/HELP repayment amount, as the benefit amount is treated as salary.

Case study: Sam

You’ll pay the concessional tax rate of 15% on any salary sacrificed super contribution up to the threshold (if you earn under $250,000, including your super contributions). This effectively means your super account balance would increase by 85% of the pre-tax contribution.

Let’s look at a scenario. Sam Saver gets a pay rise of $10,000 a year. He has the choice to take this as additional fully taxable income or boost his super through salary sacrificing.

No salary sacrificingWith salary sacrificing
Salary$65,000$65,000
Salary sacrificed amount$10,000
Superannuation Guarantee entitlements at 9.5%$6,175$6,175
Super contributions tax$926$2,426
Net super contributions$5,249$13,749
Taxable income$65,000$55,000
Less tax (incl. Medicare levy and low income tax offset)$13,947$10,347
Net salary$51,053$44,653
Plus net super contributions$5,249$13,749
Net benefit$56,302$58,402
Tax saving with salary sacrificing$2,100

Based on 2019/20 tax rates. Assuming no HELP debt.

What about salary packaging?

There’s no doubt salary sacrificing can help build your super in a tax-effective way.

But packaging your salary in this way can affect your Superannuation Guarantee entitlements if your employer decides to pay them on your salary less the salary sacrificed amount. You need to be sure that your total salary package is not reduced due to salary packaging.

Let’s see how this would have affected Sam:

Gross earningsSuperannuation Guarantee entitlements at 9.5%
$65,000$6,125
$55,000$5,225
Difference($950)

Gross earnings

Is salary sacrificing right for you?

Not everyone will benefit from salary sacrificing – considerations will include your marginal tax rate and the types of things you’re ‘packaging’.

For example, if you’re on the highest marginal tax rate, you’ll get a bigger benefit from salary sacrificing arrangements because the tax saving is greater (15%* as opposed to 45%**). But there may not be any benefit if you’re a low income earner.

*If total assessable income is below $250,000

**Note: these tax rates do not include the Medicare levy

Annual caps on super contributions

Remember that annual caps apply to super contributions, and additional tax can be payable if your contributions go over these caps.

Caps on employer, salary sacrifice, and other concessional contributions are indexed annually. The new indexed amount is available each February.

Be careful that your total concessional contributions are not more than the contributions cap, or they will be added to your assessable income and taxed at your marginal tax rate.

Other info you might be interested in

What are co-contributions?

The super co-contribution is a tax-free bonus from the government to help people on low to middle incomes boost their super.

The basics of super investments

Whether you’re just starting out or nearing retirement, it’s important to take an interest and make your super investment work for you.

The role of financial planning

Good financial advice can help you set goals and make confident and informed financial decisions, now and in the future.

Learning Hub

Understand your super and the simple steps you can take to stay in control.

We're here to help

If you want to learn more or need help with making a decision about your super, you can get simple advice over the phone or face to face. It’s included as a part of your membership so there’s no extra cost.