Salary sacrificing to superannuation
RECENTLY I received a question about the merits of salary sacrificing to super, as opposed to taking the money in your pay packet. The questioner and her husband were both in their mid fifties and were having a difference of opinion about strategy. He felt it was better to take the money in hand to provide certainty, but she felt it would be more effective to use salary sacrifice. They both earned around $55,000 a year.
I am a strong believer in salary sacrifice for people in that age bracket because they could access their superannuation if they retired, and also have a fairly low risk of being affected by any law changes.
Also, money taken in hand tends to be spent whereas money contributed to super is locked away.
The maths work well because of the difference in the 15% entry tax on super, and the employee’s marginal tax rate. For example, if the couple in question took $5,000 in hand they would lose $1575 in tax and have $3425 over. However, if that $5,000 was salary sacrificed to super they would lose just $750 tax and have $4250 over. Furthermore, the tax on the earnings on money within super is 15% whereas, in their case, earnings would be taxed at 31.5% if the money was invested outside super.
A word of caution – before entering into a salary sacrifice arrangement make sure your employer will not use this as an opportunity to reduce the compulsory 9%. True, it doesn’t happen very often, but it does happen enough for people to be wary of it.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org.
Question: With the Budget changes to salary sacrificing, I am wondering if there is any merit in continuing with my transition to retirement pension. I am 57 years old and earn $120,000. For the 2009/2010 year I was planning to salary sacrifice $80,000 and take out a TTR of $25,000 a year – but am wondering if there is now any tax advantage in doing this. If I put any non-concessional contributions into super, is there any advantage in putting it into my spouse’s account? She has just turned 60, does not work and has minimum super.
Answer: From July 1, 2009 your maximum deductible contribution to super from all sources is limited to $50,000. Therefore, if your employer is contributing $10,800 (9% of $120,000) your additional salary sacrificed contributions will be limited to $39,200. There is still a significant tax saving to be made but it will not be as much as it would have been under the original rules.
Question: We sold two investment properties last year (2008), one unit sold in May 2009 with a profit of $65,000 for which we paid capital gains tax in last tax return We sold the second property in July 2009 at a loss of $140,000. As it was deemed to be sold in the next financial year the loss could not be offset against the gain
Is there any way of offsetting this loss?
Answer: Unfortunately you cannot rewrite history but your question illustrates the importance of taking advice before buying or selling assets. I assume you are aware that it is the contract date that is the relevant one and not the date of settlement. Depending on your circumstances it may be possible to reduce CGT by making a tax deductible contribution to super before 30 June
Question: I note that the amount you can contribute to super changed from $100,000 to $50,000 from July of last year. What happened to the previous governments ruling that you could contribute to super at $100,000 each year till 2012? I had made plans for retirement according to that, now I stand to loose that benefit.
Answer: Unfortunately it is a sad fact of life that the rules regarding superannuation are continually changing and legislation put in place by one government is not binding on another. Fortunately, people aged 50 and over are still able to contribute $50,000 a year to super until June 2012 so there are still some worthwhile tax benefits to be enjoyed.