What are before-tax contributions?
Before-tax (concessional) contributions are contributions added to your super account before your income tax has been deducted. These are generally taxed at 15% when added your super account, instead of your marginal income tax rate, which can be as high as 45%.
Salary sacrifice
Salary sacrifice is a type of before-tax contribution. It's an arrangement between you and your employer to redirect some of your before-tax (gross) salary into your super account instead of your bank account. It means your take-home pay will reduce in the short-term, but you end up with more in the long-term.
This can reduce the tax you pay and give you more money in the long-term. Salary sacrifice helps you pay less tax in three ways:
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Reduce your income tax
- Before-tax salary paid to your super account gets taxed at 15% (unless your combined income and super contributions are more than $250,000, in which case the tax is 30%). This compares to any salary you take home which will get taxed at your usual marginal tax rate, which can be as high as 45% (plus Medicare levy).
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Reduce your taxable income
- You can reduce your taxable income with every dollar salary-sacrificed to super. The more before-tax salary you put into your super, the lower your taxable income will be.
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Lower tax on investment earnings
- Generally, the investment earnings your super money generates is taxed at a low rate of up to 15%, while investment earnings made outside of super are taxed at your marginal tax rate. In addition, you usually don't have to declare your super-related investment earnings on your tax return.
If your employer doesn’t offer salary sacrifice, you can make after-tax contributions & claim a tax deduction.
Questions for your employer:
- Will your employer allow you to salary sacrifice into 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 salary sacrifice?
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.
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 – this 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 is more than $250,000.
- Reduce your take-home pay by too much.
