Are you getting Super tax benefits?

Salary sacrifice arrangements can be a tax-effective option for individuals to boost their retirement savings with additional employer superannuation contributions above the compulsory employer contributions. It is a good idea, too, for individuals to regularly assess whether their existing salary sacrifice arrangements are still suitable for their needs.

The tax benefits available from salary sacrificing into superannuation are largely determined by the difference between the individual’s marginal tax rate and tax treatment of the contributions in the superannuation fund’s hands. To maximise the benefits, individuals should regularly examine the effectiveness of their salary sacrificing arrangements and take into account changes to the individual tax rates and thresholds.

Compulsory employer contributions

The minimum level of quarterly employer superannuation guarantee support is 9.5% from 1 July 2014 (as legislated at the time of writing). The superannuation guarantee rate will stay at 9.5% until 30 June 2021 before increasing by 0.5% each year until it reaches 12% from 2025–2026.

Higher income earners

From the 2014–2015 income year, the effective top marginal tax rate is 49% (including the 2% temporary budget repair levy and the 2% Medicare levy) for an individual whose taxable income exceeds $180,000. As a result, salary sacrifice arrangements (up to the concessional cap) carry an effective tax concession of 34% (ie the 49% top marginal tax rate less 15% contributions tax) for an individual whose taxable income is between $180,000 and the high-income threshold of $300,000. For taxpayers with income above the $300,000 high-income threshold, the tax concession is reduced to 19% (ie the 49% top marginal tax rate less 15% contributions tax and 15% Div 293 tax).

Higher contribution caps

Tax-effective salary sacrificing arrangements are effectively restricted to the relevant concessional contributions cap. The general concessional cap has increased through indexation to $30,000 from 2014–2015. A higher concessional contributions cap of $35,000 (not indexed) applies from 2014–2015 for taxpayers who were aged 49 years or over on 30 June 2014. This temporary $35,000 concessional cap will cease when the general cap reaches $35,000 through indexation (which is expected to be on 1 July 2018). Individuals should review their salary sacrifice arrangements to take into account these higher concessional caps.

Any excess concessional contributions made on or after 1 July 2013 will be assessed at the individual’s marginal tax rate (including an interest charge to take into account the deferred payment of tax).

The concessional contributions cap applies on a per-person basis, which means people with multiple employers need to be aware that superannuation guarantee contributions from each employer will count towards the individual’s concessional contributions cap. As a result, the effective limit on a salary sacrifice arrangement will be reduced where the individual has concessional contributions from other sources.

Review your existing arrangements

Employees should examine the higher contribution caps and assess whether the current arrangements still suit them. Employees also need to monitor for any “tinkering” with the superannuation system by governments. For example, the 2016 Federal Budget contained a number of superannuation measures that will affect retirement savings, including the reduction of the concessional contributions cap to $25,000 for all individuals (regardless of their age) from 1 July 2017. The cap will then be indexed in line with wage growth. Any excess concessional contribution (back to 1 July 2007) will be counted towards the proposed $500,000 lifetime cap for non-concessional contribution.

Although these changes are not law at the time of writing, their proposal is a good example of why employees should actively monitor for changes to the superannuation system that could impact their retirement savings.

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This is not an exhaustive discussion of all relevant matters. Individuals should seek advice tailored to their circumstances. Please contact our office for further information.