How to 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.

By way of example, let’s consider the case of Bill, 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 came into effect from July 1, 2012.

 

Bill’s salary package (2012-13) $65,400 $65,400
Salary $60,000 $60,000
Employer 9% super guarantee contribution $5,400 $5,400
Salary sacrifice contribution to super $2,000
Taxable income $58,000 $60,000
Income tax on salary (no offsets, deductions) -$10,397 -$11,047
Medicare levy (1.5%) -$870 -$900
After tax super contribution
(to reach same take-home pay)
-$1,320
Take-home pay, after super contributions $46,733 $46,733
Total super contribution (before tax) $7,400 $6,720
Total super contribution (after tax) $6,290 $5,712

Of course, in the no-salary-sacrifice scenario, Bill 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 Bill’s super fund. And even after pumping up his super contributions, there are further tax savings for Bill because the earnings 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.