Why does salary sacrificing to your super fund save you tax?
If you make under the tax free threshold (currently $18,200) it is arguable you pay MORE tax. This is relatively uncommon amongst my clients so I will discuss the more likely scenario for them
Most of my clients tend to make over $100k per year. Very few of them make over $180k so whilst they are well off, they are certainly not rushing out to buy luxury yachts. In this income tax category, these clients are taxed at a rate of 37% for every dollar they earn over $80,000.
For these clients, if they salary sacrifice into super (assuming the amount is under contribution caps), they will pay tax at 15%. This means a tax saving of 17c in the dollar on the amount contributed. To put that into perspective, if you earned 17% on your investments in one year, you would be jumping for joy! Assuming my client salary scarified $15k into their super that year and that all of that amount was taxed at the 37% rate, this would mean they have essentially saved $2,550.
But the tax advantages don’t end there. That $15,000 would be invested in line with their superannuation investments. Now presumably those investments should provide earnings. If my client had invested outside of super, they would need to pay tax on those earnings at their marginal rate, which is at 37c in the dollar. On the earnings in their super, they are taxed at 15% again! That is another 17c in the dollar tax saving.
Now we all know the disadvantages of investing in super. What you make up in tax savings you lose in flexibility to access the money whenever you want. However, in circumstances where the client wished to save for their retirement anyway, it just makes logical sense to utilise the superannuation environment.
Now if the client held the investments outside of super, when they finally sold them, they would be subject to Capital Gains Tax (CGT). This is quite complex but generally, assume that the increase in value (divided by 2) will be taxed at the investor’s marginal rate. However, if the investor has reached a condition of release within their super fund and has reached their preservation age, provided the benefits have been taxed in the fund and they are taking a lump sum, they will pay no tax on realisation of those benefits. Now I must caveat this before you get carried away. Withdrawing from your super is a complex issue and one that can change from time to time. Before taking any steps to withdraw money from your super, make sure you seek advice as there can be tax consequences which are not outlined above.
So there you have it, a very high level of overview of how and why salary sacrificing into your super fund can be tax beneficial. The next step once you’ve started salary sacrificing is picking the right investments. If you want to talk super, why not contact us? Our first meeting is always free.
As always please leave any questions below.
This post is from our resident Financial Planner Cara Brett, check out her details in the About Us section.