Salary sacrificing – making before-tax (concessional) contributions from your salary into your super – may be an effective way to help grow your super and set yourself up for a comfortable retirement.
For most people, their salary sacrifice arrangements are on top of the 9.5% pa super guarantee (SG) contributions that employers are legally obliged to make into their employees’ super funds.
Previously, while many employers paid the same SG contributions whether an employee was salary sacrificing to super, some employers reduced their SG contributions where an employee elected to salary sacrifice, because the SG rules allowed employers to base their 9.5% SG contributions on an employee’s ‘ordinary time earnings’ (which doesn’t include salary sacrifice contributions).
The previous rules also allowed salary sacrifice contributions to count towards meeting an employer’s 9.5% SG obligation.
From 1 January 2020, the law generally requires an employer to contribute 9.5% of an employee’s ordinary time earnings (OTE) base. Your OTE base is broadly your earnings during your ordinary hours of work, as well as salary sacrifice contributions made from those earnings.
Employers are also prevented from counting salary sacrifice contributions towards meeting their 9.5% SG obligations.
The difference one law could make
This new law ensures that everyone will get the amount of SG they’re entitled to – regardless of whether they’re adding more to their super through salary sacrifice. And for some people, this could make a big difference to their super balance.
Case study
Maria earns $60,000 a year as a teacher. Because she’s keen to build up her super so she can retire comfortably, every three months she salary sacrifices $1,000 into her super.
Before 1 January 2020, Maria’s employer was calculating her super guarantee contribution based on her annual income less her salary sacrificed amount of $4,000. This meant that her super guarantee contribution was based on her annual income of $56,000 instead of $60,000.
From 1 January 2020, Maria’s employer will contribute 9.5% ($1,425) each quarter, plus her salary sacrifice amount of $1,000. That means Maria will put away $2,425 (made up of salary sacrifice & super guarantee contributions) a quarter in super – a total of $9,700 a year, compared to $9,320 in previous years.
Under the new law, Maria will have an extra $380 contributed to her super.
| Before 1 January 2020 | From 1 January 2020 | |
| Salary sacrifice | $4,000 per year | $4,000 per year |
| Employer super guarantee contribution | $5,320 per year | $5,700 per year |
| Total contributions | $9,320 per year | $9,700 per year |
Why making extra super contributions makes sense
Salary sacrificing even small amounts to your super – as little as $10 or $20 a week – could make a real difference over time. That’s partly because any returns on your super will be compounded over the years, which may boost your super balance.
What’s more, when you salary sacrifice, you’re contributing money from your wage before you get taxed on it. Your contributions will generally be taxed at 15%, which may be less than your marginal rate of up to 47%.
Other ways to build your super
Not all employers offer salary sacrifice arrangements. And as a result of this new law, employers that were previously allowing their employees to salary sacrifice may decide to no longer offer this option.
But don’t worry, because if salary sacrificing isn’t an option for you there are still other ways you can boost your super savings.
For example, you can contribute some of your after-tax salary yourself into your super. As you’ve already paid tax on this money, you won’t be taxed on this contribution in your super fund.
You could also choose to make a personal tax-deductible contribution. The contribution will generally be taxed at 15% but you will receive a tax deduction at your marginal tax rate.
There are many conditions to claiming a personal contribution as a tax deduction – you must submit a valid notice to your super fund that you’re going to claim a tax deduction for your contribution (within required timeframes) and the fund must acknowledge your notice, prior to you claiming the tax deduction in your tax return.
There are other additional conditions – so seek advice if you are planning claim a tax deduction on your super contributions.
Remember, both before and after-tax super contributions are capped, so it’s important not to go over that limit or you could pay additional tax.
Before-tax (concessional) contributions, which include your SG, salary sacrifice and personal contributions that are eligible for a tax deduction, are capped at $25,000 while after-tax (non-concessional) contributions are capped at $100,000.
