As a member of BAN TACS Accountants, IN8 Business Advisory has exclusive access to Noel Whittaker’s tips on building your wealth and minimising your risk. This latest article discusses the merits of salary sacrificing to maximise your superannuation contributions. Consult your financial advisor for further guidance.
Column By Noel Whittaker, November 12, 2016
The superannuation system is full of anomalies – one of the worst is the rule that prevents an employee claiming a tax deduction for additional superannuation contributions, if the employer is contributing for them.
The May budget tried to fix this by allowing a tax deduction for such contributions, but Labor opposed it, and we are stuck with the original system.
There is a way around it – salary sacrifice. You ask your employer to put part of your gross pay into superannuation instead of paying it to you.
It’s a great way of saving tax because salary sacrificed contributions lose tax of just 15% – in contrast to at least 34.5% if the money went to you instead of your superannuation.
Think about somebody earning $90,000 a year who receives a pay rise of $10,000. If it goes into their pocket they will lose $3900 in tax, and have just $6100 left over. However, if the employer contributed it to their super fund it would lose only $1,500 in tax, leaving them with $8,500 in an environment where income tax is just 15%, and where it cannot be touched until they reach their preservation age which may well be 57 or more.
Salary sacrifice is a particularly attractive strategy for people with their own business because it’s one of the few assets that cannot be touched by the trustee in bankruptcy if they go broke.
Salary sacrifice is also the perfect strategy for high income earners in their 50’s with a mortgage. What’s the point of losing up to 47% of your salary before you get the money to pay off your mortgage, when you can lose just 15% if you put it into super and then take it out tax free when you retire.
I am receiving a lot of emails asking if it is appropriate to salary sacrifice when the market is having a down period. It is the perfect time because the money going into your super fund is buying shares at a time when the market is clearly undervalued. For example last week it jumped over 3% in a single day. It also enables you to practice the well known technique of dollar cost averaging which is a disciplined strategy that guarantees profits when the market eventually recovers.
Just make sure you watch the contribution caps. The employer compulsory 9.5% is included.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions.
Email: noel@noelwhittaker.com.au