What are before-tax contributions?
Before-tax or concessional contributions are contributions added to your super account before deducting your income tax. These are generally taxed at 15% when added to your super account instead of your marginal income tax rate, which can be as high as 45% - saving you up to 30% on tax.
What is Salary Sacrifice?
Salary sacrifice is a strategic way to boost superannuation by diverting part of your pre-tax salary directly into your super account rather than receiving it as take-home pay. This arrangement with your employer can help you save on income tax and boosts your long term balance. Salary sacrifice helps you pay less tax in three ways:
- Lower tax rates: Contributions via salary sacrifice are taxed at a concessional rate of 15%, significantly lower than the marginal tax rates that can go up to 45% (plus the Medicare levy) for take-home pay.
- Decreased taxable income: Each dollar sacrificed to your super reduces your income, potentially placing you in a lower tax bracket.
- Lower tax on earnings: Super investment earnings are generally taxed at a maximum of 15%, whereas investments outside super are taxed at your marginal rate. Super investment earnings don't need to be included in your tax return.
How to set up salary sacrifice
If salary sacrifice is right for you, speak to your employer, who can direct some of your pay into your super. If your employer doesn't allow salary sacrifice arrangements, you can make an after-tax contribution & then claim a tax deduction.
Questions for your employer:
- Will your employer allow you to sacrifice your salary for super?
- Are you able to start or stop at any time?
- Can you change amounts at any time?
- Does your employer charge an administration cost?
- Does your employer set any limits to how much you can sacrifice in your salary?
If salary sacrifice isn't available through your employer, you can consider making after-tax contributions and possibly claiming a tax deduction for these contributions.
Salary sacrifice limitations
When setting up your salary sacrifice, you should consider whether the amount you wish to salary sacrifice will:
- Cause you to exceed your concessional (before-tax) contributions cap and attract additional tax – the concessional contributions cap limits the amounts that can be contributed to your super fund and still receive the concessional tax rate of 15%.
- Attract a Division 293 tax. This occurs when your income and concessional contributions exceed $250,000.
