If you’re an employee on a middle to high income, chances are you’ve heard the term “Salary Sacrifice” and have a fair idea of the benefits. If so, you may be part of a small percentage of employees who actually have a current salary sacrifice arrangement in place with your employer.
Great! You’re saving tax and making extra contributions to super.
However, as of 1 July 2017, the rules around salary sacrificing are changing…..in a big way! If you haven’t already, now is the time to review your salary sacrifice arrangements.
Before I go into what’s changing, for the benefit of all, let me quickly explain what we are talking about here.
What is Salary sacrificing?
Salary sacrificing to superannuation is making before-tax super contributions to boost your superannuation balance whilst reducing the amount of income tax payable on your salary. This can be an effective strategy for employees on middle-to-high incomes. The net benefit is that you boost your super by more than what you would otherwise receive in after-tax income, i.e. a small sacrifice for a larger gain. (Note this may not be advantageous for those on lower incomes).
Without getting too technical, the additional super contributions through salary sacrifice are treated as concessional contributions, in the same way as the compulsory super contributions from your employer, and attract a concessional tax rate in the superfund.
So what’s changing on 1 July?
As of 1 July 2017, the concessional contribution caps are changing.
For the current financial year, your concessional cap is $30,000 if you were 48 or younger on 30 June 2016, and $35,000 if you were 49 or older on 30 June 2016.
This concessional contribution cap will be reduced to $25,000, regardless of age. (Special rules apply if you are 65 and over, and voluntary contributions are not permitted after you turn 75).
Importantly, the compulsory super contribution made by your employer, generally 9.5% of your base salary, as well as any salary sacrifice contributions count towards this cap.
Secondly, from 1 July 2017, individuals under the age of 75 who are eligible to contribute to super will be able to claim tax deductions for personal super contributions, subject to the concessional contributions cap, and taking account of previously-made super contributions for the financial year.
This is something that is currently only available to self-employed individuals. As an employee, up to now the only way to make a concessional contribution to super was via salary sacrificing. This is a big change that may prove a game changer to salary sacrificing.
So what does this mean for you?
Lower Cap – If you are currently salary sacrificing, you need to review your arrangements now. If your total concessional contributions this financial year, including compulsory employer contributions, exceed $25,000 then you will likely need to reduce the amount you are salary sacrificing next year to ensure you stay under the new cap of $25,000.
Bear in mind also that any future pay rise will also increase your compulsory employer contributions and may put you at risk of exceeding the new cap.
More Flexibility – you will have more flexibility in how you utilise your concessional contribution cap. In effect, you will have more than one way to get the tax benefits of concessional contributions. Next financial year you can choose to stop or reduce your salary sacrificing, and instead make a tax deductible personal contribution to super.
As an example, say your compulsory employer contributions come to $10,000 for the year. You may then contribute an further $15,000 as a personal contribution and claim a tax deduction in your annual tax return.
Of course, you could opt to continue the more disciplined approach of salary sacrificing and contribute the $15,000 in small regular amount automatically deducted from your pay, or you may even choose to use a combination of both methods.
Which option you choose really depends on your work situation and personal circumstances. In any case, the additional flexibility will be beneficial for those of you whose employers do not offer salary sacrificing, or who have irregular or seasonal incomes. It will also make it easier to contribute an unexpected bonus payment or other unexpected windfalls to super, and claim a tax deduction for it.
So whilst the cap is reduced, the added flexibility should make it easier for people to utilise their concessional contributions and boost their super.
There are a number of other superannuation changes being introduced on 1 July. If you’d like to know more please do not hesitate to get in touch with me and make sure you’re ready.
Don’t forget to be social. Like if you liked this, and as my 2 year old son tells me, sharing is caring.
General Advice Warning – This advice may not be suitable to you because it contains general advice which does not take into consideration any of your personal circumstances. All strategies and information provided in this article are general advice only. Please contact us or seek personal financial and taxation advice prior to acting on this information.