Many of our clients have salary sacrifice arrangements with
their employers – as they can be a very effective way to tax-effectively save
for retirement. However, if not done correctly, salary sacrifice can
actually have negative consequences. The following checklist will ensure
you are getting the most benefit from your arrangement:
The first step is to assess your tax-position. Any
amount you salary sacrifice will be taxed at 15% – which in most cases is
better than if clients take the money as wages as they can pay up to 45%.
If you are paying less than 15% on your income as wages – then salary
sacrificing would mean you pay more tax.
The second step is to determine whether your employer allows
salary sacrifice. These days, most do, however, an employer can
rightfully decline your request.
Thirdly, ensure your other entitlements are not negatively
impacted. For example, some employers will use this as an opportunity to
pay you less Superannuation. Salary Sacrifice is recorded as an “Employer
Contribution”. By law – this means that they employer may have met their
minimum legal obligation to you and no longer have to pay the standard SG
(currently 9%). Similarly, Salary Sacrifice reduces your taxable income –
and some employers may pay their 9% based on the lower income.
Also be careful with employment termination payments, as
some employers may use the lower amount when determining an employee’s
The fourth step, ensure your agreement does not breach the
concessional contributions caps. As of July 1, 2012, everyone regardless
of age, is allowed to contribute $25,000 of concessional contributions.
As this includes your employers contributions plus your additional salary
sacrifice contributions – you need to do your sums before entering into
it. The penalty for going over $25,000 – tax at 46.5%.
And finally, seeing that salary sacrifice is a legal
agreement – get it in writing. This may save problems and confusion in
the future such as if contributions are made incorrectly.