When you choose to contribute part of your before-tax salary to go to your super account, they will be generally taxed at a maximum rate of 15%, which is generally less than your marginal tax rate, which can be as high as 45% (not including Medicare levy). So, putting some of your income into super via salary sacrifice, your taxable income is lowered, and so could your tax bill.

 

Boost your super the champions way

Salary sacrifice can be one of the most tax-effective ways to add to your super.

Everyone’s situation is different, and we can’t tell you whether you should add to your balance as we haven't considered your financial situation. So, before making additional contributions, you should consider your own personal circumstances and if this is the right thing for you.

 

 

Be a champion with the power of compounding returns

Super investments can grow faster in a tax-effective environment, so each additional contribution may make a big difference in the long run thanks to the power of compound returns.

The following case studies show the long-term benefits of boosting your super due to compounding returns.

Case Study: Sam benefits from contributing to super

Sam is 34 years old, has $54,000 in super and earns $55,600 per year. She starts adding to their super through salary sacrifice $100 per fortnight until age 52, then $150 per fortnight until age 57. Finally, San makes contributions of $200 per fortnight until retiring at age 67.

With every contribution that they make into super, their salary is taxed on the amount remaining after their contribution is removed. So if they earn $55,600 per year and add $100 per fortnight into super (or $2,600 per year), their taxable income for the year is considered $53,000. The tax savings are $573!

Assumptions:

  • Retirement balances are rounded to the nearest $1,000 and are stated in today's dollars, deflated using Average Weekly Ordinary Time Earnings (AWOTE) at 3.0% p.a
  • Based on someone age 34 and planning to retire at age 67. ;
  • Based on SG of 10% for 2021/22 and then each financial year by 0.5% until it reaches 12% on 1 July 2025 (where it will remain at 12%)
  • Based on 2021/22 income tax rates.
  • Investment returns are based on the Aware Super MySuper Life Cycle option, assumed to be CPI + 4% until age 55, reducing from CPI + 4% to CPI + 3% between the ages 55-65 (inclusive) and CPI + 3% from age 65 onwards.
  • CPI is assumed to be 2.5% p.a.
  • Salary Sacrifice contributions increased in line with annual salary increase of 3.0% p.a. and assumes concessional contribution caps are indexed in line with AWOTE;
  • No admin fees and earnings tax are modelled as investment returns are assumed to be net of fees and tax;
  • Insurance premium is assumed to be $380 p.a., indexed with AWOTE of 3% p.a.;
  • This example is for illustrative purposes only and is not intended to provide a forecast or guarantee on outcome. It is a broad illustration of the steps a member could take, but the actions appropriate for an individual will vary depending on their personal circumstances. The case study is based on current regulatory requirements and laws, including tax rates, which may be subject to change. Investment return assumptions are for illustrative purposes only and for simplicity assume an average rate of return each year throughout the investment period. Actual returns year on year may be negative and may vary materially. If investment returns/inflation are higher/lower, final balances will differ.

Case Study: Jacob benefits from contributing to super

Jacob is 42 years old, has $90,000 in super and earns $95,000 per year. He decides to start adding to his super through salary sacrifice as follows: 

  • $100 per fortnight until age 52, then 
  • $150 per fortnight until age 57.
  • Finally, he makes contributions of $500 per fortnight until retiring at age 67 with a big difference in his super! 

With every contribution that they make into super, their salary is taxed on the amount remaining after their contribution is removed. So if they earn $95,000 per year and add $100 per fortnight into super (or $2,600 per year), their taxable income for the year is considered $92,400. The tax savings are $585!

Assumptions:

  • Retirement balances are rounded to the nearest $1,000 and are stated in today's dollars, deflated using Average Weekly Ordinary Time Earnings (AWOTE) at 3.0% p.a
  • Based on someone age 42 and planning to retire at age 67. ;
  • Based on SG of 10% for 2021/22 and then each financial year by 0.5% until it reaches 12% on 1 July 2025 (where it will remain at 12%)
  • Based on 2021/22 income tax rates.
  • Investment returns are based on the Aware Super MySuper Life Cycle option, assumed to be CPI + 4% until age 55, reducing from CPI + 4% to CPI + 3% between the ages 55-65 (inclusive) and CPI + 3% from age 65 onwards.
  • CPI is assumed to be 2.5% p.a.
  • Salary Sacrifice contributions increased in line with annual salary increase of 3.0% p.a. and assumes concessional contribution caps are indexed in line with AWOTE;
  • No admin fees and earnings tax are modelled as investment returns are assumed to be net of fees and tax;
  • Insurance premium is assumed to be $380 p.a., indexed with AWOTE of 3% p.a.;
  • This example is for illustrative purposes only and is not intended to provide a forecast or guarantee on outcome. It is a broad illustration of the steps a member could take, but the actions appropriate for an individual will vary depending on their personal circumstances. The case study is based on current regulatory requirements and laws, including tax rates, which may be subject to change. Investment return assumptions are for illustrative purposes only and for simplicity assume an average rate of return each year throughout the investment period. Actual returns year on year may be negative and may vary materially. If investment returns/inflation are higher/lower, final balances will differ.

Case Study: Georgia benefits from contributing to super

Georgia is 50 years old, has $170,000 in super and earns $115,000 per year. Sam decides to start adding to her super through salary sacrifice as follows: 

  • $150 per fortnight until age 55, then
  • $250 per fortnight until age 60. 
  • Finally, she makes contributions of $500 per fortnight until retiring at age 67 with a big difference in her super. 

With every contribution that they make into super, their salary is taxed on the amount remaining after their contribution is removed. So if they earn $115,000 per year and add $150 per fortnight into super (or $3,900 per year), their taxable income for the year is considered $111,100. The tax savings are $878!

Assumptions:

  • Retirement balances are rounded to the nearest $1,000 and are stated in today's dollars, deflated using Average Weekly Ordinary Time Earnings (AWOTE) at 3.0% p.a
  • Based on someone age 50 and planning to retire at age 67. ;
  • Based on SG of 10% for 2021/22 and then each financial year by 0.5% until it reaches 12% on 1 July 2025 (where it will remain at 12%)
  • Based on 2021/22 income tax rates. 
  • Investment returns are based on the Aware Super MySuper Life Cycle option, assumed to be CPI + 4% until age 55, reducing from CPI + 4% to CPI + 3% between the ages 55-65 (inclusive) and CPI + 3% from age 65 onwards.
  • CPI is assumed to be 2.5% p.a.
  • Salary Sacrifice contributions increased in line with annual salary increase of 3.0% p.a. and assumes concessional contribution caps are indexed in line with AWOTE;
  • No admin fees and earnings tax are modelled as investment returns are assumed to be net of fees and tax;
  • Insurance premium is assumed to be $380 p.a., indexed with AWOTE of 3% p.a.;
  • This example is for illustrative purposes only and is not intended to provide a forecast or guarantee on outcome. It is a broad illustration of the steps a member could take, but the actions appropriate for an individual will vary depending on their personal circumstances. The case study is based on current regulatory requirements and laws, including tax rates, which may be subject to change. Investment return assumptions are for illustrative purposes only and for simplicity assume an average rate of return each year throughout the investment period. Actual returns year on year may be negative and may vary materially. If investment returns/inflation are higher/lower, final balances will differ.

 

Will Salary Sacrifice work for me?

Salary sacrifice contributions receive specific tax treatment, and as a result, this type of contribution tends to be better suited to those who earn at least $23,226 a year with a marginal tax rate of 19% or more.

Those earning less than that amount might benefit more from making after-tax personal contributions in order to take advantage of the government co-contribution.  It's probably best to seek financial advice on which type of contribution will suit you.

For higher income earners, it may be worth having a chat to a financial planner as salary sacrificing may take you over the before-tax contribution cap depending on your income. Do you earn over $250,000 per year? If you do, your before-tax contributions will generally be taxed at 30%.

The example below shows a comparison of before and after-tax contributions to help decide what is right for you.

Pat is 35, has an annual income of $65,000 before tax and has surplus funds of $2,080 per year. Pat would like to add this $2,080 surplus to super during the 2021/2022 financial year and on. But should Pat pay this before or after tax? This example shows that by including his tax savings into salary sacrifice, Pat has an additional $665 in their end position.

Assumptions:

  • Income tax calculation based on 2021/22 rates 
  • Based on someone age 35 and planning to retire at age 67
  • Personal and salary sacrifice contributions remain unchanged in real terms over the next 32 years
  • Amounts stated in today’s dollars, deflated using AWOTE of 3% p.a.
  • Investment returns are based on the VicSuper MySuper option, assumed to be CPI + 3.75% p.a. CPI is assumed to be 2.5% p.a.

Before adding to your super with your own money, consider:

  • What are your broader financial goals?
  • How much do you realistically need today, and how much can you afford to put away?

If you’re not going to access your super for several decades but you’re looking to buy a house soon, personal contributions may not necessarily be the right option for you.

But bear in mind the earlier in life you start contributing to super, the more it will be worth in years to come. Through the principle of compounding interest, when you start putting money into super is actually more important than how much you deposit.

Consider other ways of boosting your retirement savings, such as optimizing your investments with an aggressive long-term strategy, or adding to super through salary sacrifice.

Anyone can make a personal contribution, but once you reach age 67, you’ll need to satisfy a work test to show you worked 40 hours over a consecutive 30-day period in the financial year you make the contribution. If you meet the work test, you can also make contributions in the following year.1

1The information in this document may be impacted by measures announced in the May 2021 Federal Budget, some of which have not been passed at the time of publication.

The government limits the amount you can contribute to your super each year without paying extra tax. These limits are called contribution caps which are in place for both concessional (before-tax) and non-concessional (after-tax) contributions.

From 1 July 2021, there is an annual cap of $27,500 for concessional contributions. If eligible, you may be able to carry forward and use any unused cap amounts up to five years.

For example, if you contributed $20,000 in 2019/20, and $20,000 in 2020/21, you’ll have $10,000 in ‘unused’ contributions that you may contribute in 2021/22 in addition to your annual cap $27,500. This cap is inclusive of the 10% super guarantee from your employer. It’s also a combined total across all funds you might have, which is important to keep in mind if you’re contributing to more than one super account. If your contributions exceed the cap, this amount will be considered part of your assessable income and taxed at your marginal tax rate.

The Australian Taxation Office will give you the opportunity to apply for a refund of up to 85% of the excess contributions and you’ll also receive a 15% tax offset in your tax return.

For more information, refer to our Super tax caps factsheet

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