THE CHANGES THAT MAY BENEFIT YOU
Previously, while many employers paid the same SG contributions whether an employee was salary sacrificing to super, some employers reduced their SG contributions where an employee elected to salary sacrifice, because the SG rules allowed employers to base their 9.5% SG contributions on an employee’s ‘ordinary time earnings’ (which doesn’t include salary sacrifice contributions). The previous rules also allowed salary sacrifice contributions to count towards meeting an employer’s 9.5% SG obligation.
From 1 January 2020, the law generally requires an employer to contribute 9.5% of an employee’s ordinary time earnings (OTE) base. Your OTE base is broadly your earnings during your ordinary hours of work, as well as salary sacrifice contributions made from those earnings. Employers are also prevented from counting salary sacrifice contributions towards meeting their 9.5% SG obligations.
THE DIFFERENCE ONE LAW COULD MAKE
CASE STUDY: HOW THE NEW LAW WILL HELP MARIA
Maria earns $60,000 a year as a teacher. Because she’s keen to build up her super so she can retire comfortably, every three months she salary sacrifices $1,000 into her super.
Before 1 January 2020, Maria’s employer was calculating her super guarantee contribution based on her annual income less her salary sacrificed amount of $4,000. This meant that her super guarantee contribution was based on her annual income of $56,000 instead of $60,000.
From 1 January 2020, Maria’s employer will contribute 9.5% ($1,425) each quarter, plus her salary sacrifice amount of $1,000. That means Maria will put away $2,425 (made up of salary sacrifice & super guarantee contributions) a quarter in super – a total of $9,700 a year, compared to $9,320 in previous years.
Under the new law, Maria will have an extra $380 contributed to her super.
Before 1 January 2020
From 1 January 2020
$4,000 per year
$4,000 per year
Employer super guarantee contribution
$5,320 per year
$5,700 per year
$9,320 per year
$9,700 per year
WHY MAKING EXTRA SUPER CONTRIBUTIONS MAKES SENSE
Salary sacrificing even small amounts to your super – as little as $10 or $20 a week – could make a real difference over time.1 That’s partly because any returns on your super will be compounded over the years, which may boost your super balance.
What’s more, when you salary sacrifice, you’re contributing money from your wage before you get taxed on it. Your contributions will generally be taxed at 15%, which may be less than your marginal rate of up to 47%.2
OTHER WAYS TO BUILD YOUR SUPER
But don’t worry, because if salary sacrificing isn’t an option for you there are still other ways you can boost your super savings. For example, you can contribute some of your after-tax salary yourself into your super. As you’ve already paid tax on this money, you won’t be taxed on this contribution in your super fund.
You could also choose to make a personal tax-deductible contribution. The contribution will generally be taxed at 15% but you will receive a tax deduction at your marginal tax rate.2 There are many conditions to claiming a personal contribution as a tax deduction – you must submit a valid notice to your super fund that you’re going to claim a tax deduction for your contribution (within required timeframes) and the fund must acknowledge your notice, prior to you claiming the tax deduction in your tax return. There are other additional conditions – so seek advice if you are planning claim a tax deduction on your super contributions.
Remember, both before and after-tax super contributions are capped, so it’s important not to go over that limit or you could pay additional tax. Before-tax (concessional) contributions, which include your SG, salary sacrifice and personal contributions that are eligible for a tax deduction, are capped at $25,000 while after-tax (non-concessional) contributions are capped at $100,000.3
HOW TO FIND OUT MORE
1 Assumptions: Current age of 40 retiring at age 65; salary sacrifice contributions made weekly with 15% contributions tax applying to contributions; contributions are within the concessional contributions cap; contributions increase in line with wages growth of 3% pa; investment rate of return based on a balanced earning rate of 3.46% pa compounded weekly net of tax and fees; results in today’s dollars discounted by CPI inflation of 3% pa.
2 The highest marginal tax rate is 45% plus 2% Medicare levy. Concessional contributions such as salary sacrifice are generally taxed at just 15% when received by your fund. However, a higher rate of tax may be payable on part or all of these contributions if your income and before-tax contributions are more than $250,000 in a financial year.
3 Before-tax (concessional) contributions are limited to a general cap of $25,000 in a financial year, with additional tax applying for contributions in excess of this cap. Concessional contributions include employer super guarantee payments, salary sacrifice contributions and any personal contributions for which you claim a tax deduction. Unused concessional cap carry forward: If you haven’t reached your concessional contributions cap during a financial year, you may be able to carry forward unused concessional cap amounts to use in future years. Access to unused concessional cap amounts applies from 1 July 2019 and is limited to people with a total superannuation balance less than $500,000 and to unused amounts from the previous five financial years (starting from 1 July 2018). The after tax (non-concessional) contributions cap for 2019–20 is $100,000, or if you are under age 65 at any time during the financial year, you may be able to contribute up to $300,000 over a three year period using the bring-forward rule. If you are age 65 or over for all of 2019–20, then the cap is $100,000 (unless you are in year two or three of an existing bring forward period). The non-concessional cap that you would otherwise have available (including under the bring-forward rule) may also be reduced if your total super balance (across all super funds) just prior to the start of the year exceeds certain values.
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Colonial First State Investments Limited is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.