Utilizing a salary sacrifice strategy to contribute to your superannuation is a beneficial approach. However, there’s an additional opportunity to enhance your super by leveraging a strategy that involves contributing unused tax concessional contributions from previous years. An unused contribution refers to the difference between your regular yearly tax concessional contribution entitlement (currently at $27,500) and the actual contributions made. Yet, this process is not as straightforward as it might initially appear.
There’s a crucial consideration involving the maximum total super balance, which is set at $500,000. If your superannuation balance surpasses this threshold, you’re ineligible to make such contributions. This strategy was introduced in July 2018, allowing individuals with lower super balances a chance to catch up on their contributions over a span of up to five years.
The rationale behind this approach was to address potential limitations imposed by the annual cap on concessional contributions. This cap could hinder individuals with irregular income or interrupted work patterns, particularly women, from accumulating super balances comparable to those with steadier income streams.
It’s important to note that under this strategy, you’ll still have an annual limit of $27,500 for contributions, which might encompass both actual and notional employer concessional contributions, particularly in cases involving defined benefit super funds.
Suppose your employer’s concessional contributions, both actual and notional, amount to, let’s say, $11,500 annually. In this scenario, you have the option to opt for salary sacrifice and contribute up to $16,000 additionally.
The amount you choose to sacrifice will be subject to a 15 percent tax rate within the fund, assuming that the Division 293 tax (an additional 15 percent tax on concessional contributions when income surpasses $250,000) does not apply to your situation. This is in contrast to being taxed at your personal marginal tax rate.
However, it’s important to be aware of a few other considerations. Depending on the rules of your existing super fund, you might not be allowed to make salary sacrifice contributions into it. Additionally, there’s a possibility that you cannot opt for salary sacrifice if it results in a gross salary below a certain threshold established by your employment agreement or award.
It’s important not to opt for salary sacrifice below the tax-free threshold, which is the initial $21,884 (including the low-income tax offset) of your income, assuming you can afford to lower your salary to that extent. The reason is that all salary contributions are generally subject to a 15 percent tax by the fund. Therefore, it doesn’t make sense to salary sacrifice income that isn’t subject to personal tax.
Additionally, it’s crucial to ensure that your employer doesn’t decrease their super guarantee contribution due to your chosen salary sacrifice amount. Keep in mind that salary sacrifice to super is essentially considered an employer super contribution. Moreover, this choice should not impact any of your leave entitlements.
To avoid any confusion, any communication about salary sacrifice with your employer should explicitly state that the extra amount being contributed is in addition to the super guarantee that’s based on your gross salary. Furthermore, this salary sacrifice arrangement should not have any bearing on your base, total, or gross salary package, particularly in relation to leave considerations.
