Turn tax into super

Because of the way that tax is applied to superannuation, savvy employees can actually turn what would have been a tax liability into extra super by making use of a salary sacrifice arrangement.

Many workers can, by agreement with their employer, have money paid into their super fund from their salary before income tax is taken out. These before-tax contributions to a super fund can reduce their tax bill and also boost their super savings.

And the boss should generally be happy to do so, as any amounts contributed to super in this way (to a 'complying' super fund) are not considered by the Tax Office as a fringe benefit, so your employer will not have to pay fringe benefits tax on that money.

Amounts directed to a super fund via a salary sacrifice arrangement will be taxed in the hands of the fund, at the rate of 15%. So however much you can put away will escape being taxed at your marginal rates, which in most cases will be more than the rate levied on the super fund.

Put more into super, and get the same take-home pay
By way of example, let's consider the case of Barry, who earns an annual salary of $65,400 (including the 9% super guarantee). If he makes before-tax contributions to his super fund of $2,000 through salary sacrifice, instead of making an equivalent after-tax contribution (to give him the same level of take-home pay), this will add an extra $578 each year to his super.

The following scenario is for the 2012-13 income year, and is therefore based on the new marginal tax rate regime that comes into effect from July 1, 2012.

Of course, in the no-salary-sacrifice scenario, Barry could increase his take-home pay to $48,053 by not putting in the after-tax super contribution, but that would limit his concessionally-taxed super input to $5,400.

But with salary sacrifice there is less tax and more super. The difference in the amounts going into his super fund for the same take-home pay is $578 – a very handy annual boost to Barry's super fund. And even after pumping up his super contributions, there are further tax savings for Barry because the earnings his money is making from investments via the super fund are taxed at 15%. The tax on investment earnings outside of super are taxed at the individual's marginal tax rate.

Last reviewed 8/08/2012