Should you Salary Sacrifice?

Possible Benefits

The very simple example below illustrates how it’s possible to benefit from salary sacrificing in the right circumstances:

Barry is paid $54,500 per year including super ($50,000 income + $4,500 super)

Barry's employer allows him to salary sacrifice upto 20% x $54,500 = $10,900 into his super fund and receive the remaining $43,600 as income.

Barry's $10,900 in salary sacrifice is only taxed at the super fund rate of 15% - rather than the much higher marginal income tax rate he pays

Barry's income tax bill is also less because it's calculated on $43,600 rather than $54,500.

So in essence people who benefit from salary sacrificing pay less tax because their extra super payment and/or expense payments are deducted from their gross pre-tax earnings.

Should you Salary Sacrifice?

Salary sacrifice is a very tricky area to give advice about because just for starters there is no legal requirement for employers to allow their employees to salary sacrifice any of their income.

So you may want to salary sacrifice but your boss or HR department can say legally say “No you can’t”.

Typically large private sector employers and government departments are more likely to allow salary sacrificing than small private businesses.

To make things more complicated while there is no general limit to the salary sacrifice benefits an employee can take advantage of, limits may apply depending on the terms and conditions of the industrial law, award, AWA or individual contract which governs you and your workplace

Tax laws can also effect how much your employer will be willing to let you salary sacrifice because there are age based limits to the amount of tax deduction an employer can claim for super contributions

In addition salary sacrificing into super may not be the best choice for you even if it could save tax because that super money will be locked away until you retire … and for a young person in their 20’s or 30’s that’s a long time away.

You could be better off taking the normal amount in your pay packet and saving your earnings for a home deposit, to buy a car or pay for education expenses.

Because of these conflicting laws and how old you are effecting whether salary sacrifice is right for you, we strongly suggest contacting your accountant and or financial advisor before deciding to start salary sacrificing.

Article correct at its author date: February 2008. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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