Salary sacrifice and superannuation

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Superannuation |  WorkCover and salary sacrifice

Salary sacrifice can be a great way to get a part of your remuneration in a form other than cash – and not personally pay tax on it. This is where you agree to take part of your wage as a benefit of some kind, equal in value to the salary it is exchanged for.  The upside in you doing this is that your income tax is then based only on the reduced amount of salary that results.

If your employer agrees to go into a salary sacrificing arrangement with you, the benefit you get should of course be equal in value to the portion of salary that you give up. Options include a car, shares or payments for your expenses, such as school fees, child care or home phone costs for example.

There's little restriction to the sorts of things you can salary sacrifice for (see here for more options), but while you may have your own wish list, your employer might need to mull over whether or not any of them fall into the fringe benefits tax (FBT) area (see details here). This is a crucial consideration for the employer, because while you get the benefit tax-free, the employer has to pay FBT on the value of the benefit.

One of the most popular salary sacrifice benefits is superannuation. Your employer already has to pay 9% of your salary into your super fund but many people choose to top it up with salary sacrificed amounts to further prepare for their retirement.

Superannuation
Topping up your superannuation is a hugely popular option for salary sacrifice arrangements. There are several benefits for going down this path. For starters, any super put away under such a scheme to a complying fund are not considered fringe benefits, and are not taxed to your employer as such. A bonus for your employer is that such super contributions also garner them an extra tax deduction.

And within limits, super funds only pay tax on these contributions at a rate of 15%, which is most likely less than the PAYG rates you would otherwise pay if you received that component as cash. A super fund also only pays 15% tax on earnings (like interest) from the invested money, which again is most likely less than what you'd pay if you earned interest on the money yourself.

The fly in the superannuation ointment may however be the concessional caps to contributions that apply to all 'concessional contributions'.  These are contributions made from pre-tax amounts and include most contributions from an employer (which includes the super guarantee amounts and any salary sacrificed amounts).

The threshold until July 1, 2012 if you're under 50 years of age is $25,000, and if 50 or over it's $50,000 (after that date it is all set at $25,000 for everyone). If the concessional contributions caps are breached (and these include the compulsory 9% SG), the excess contributions tax is an additional 31.5% of the amount over the cap figure.

From a tax point of view, a salary sacrifice deal can be re-negotiated anytime, although a salary sacrifice arrangement is only valid for tax purposes if the agreement is in place (that is, your revised work contract is signed by all parties) before the employer starts deducting money from your salary and contributing to your super fund.

WorkCover and salary sacrifice
Compensation for injury arising out of, or in the course of, employment (such as under WorkCover arrangements) will need to be carefully approached with regard to salary sacrifice arrangements.

WorkCover claims in general are based on the total salary of an employee, not the balance left after a salary sacrificed component – but it will be best to check that this will be the case, and seek advice from the WorkCover authority or from your tax and financial adviser.

In some cases it may mean having to put any salary sacrifice arrangements on hold for the duration of your WorkCover claim, but again, it will be best to get professional advice should you find yourself in this situation.

BONUS: How to turn tax into super

Last reviewed 8/08/2012

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