Found out this morning that what I thought was a common understanding of salary sacrificing additional superannuation contributions was incorrect, and it appears to be pretty common misunderstanding! If you salary sacrifice into super, it REDUCES the amount of super that your employer is required to pay - in fact you can salary sacrifice to the point where your employer does not have to make any contributions at all! For example, if you're on a salary of $100,000 (to pick a round number), your employer makes an additional 9% superannuation contribution (known as the super guarantee payment). This is 9% of "ordinary time earnings", or OTE, and you get a $9,000 contribution. Now, two important facts: 1. Super guarantee payment is calculated on the reduced salary Salary sacrificing reduces your OTE, and therefore the amount of super that your employer has to contribute. 2. The salary sacrificed amount counts towards your super guarantee obligations Your employer can count your OWN contributions towards the 9%!!!! So with the example above, if you decide to salary sacrifice an additional 3%, or $3000, into your super, you don't necessarily end up with $3000 plus $9000 in your super. So you salary sacrifice $3000, leaving your OTE at $97,000. 9% of $97,000 is only $8,730 - and you've kicked in $3,000 of this, so your employer only has to contribute a minimum of $5,730! You can actually receive less superannuation overall by salary sacrificing, in addition to reducing your salary! This is the letter of the law - you can negotiate salary sacrificing on top of the normal contribution, but if your employer follows the letter of the law, they can count your salary sacrificed amount towards the super guarantee, and reduce the amount they pay by a corresponding amount, and the overall total is less than what you would have received in both salary AND super is less than if you had not sacrificed at all. Now obviously many employers still pay the 9% as expected, i.e. $9,000 in this case, and the employee's contribution takes it to $12,000 overall - but the point is, this is NOT how the law can be interpreted. I worked out that salary sacrificing 8.26% effectively cancels out your employer from making any contributions at all if they interpret the law strictly, and that you would have to set your sacrifice at the full 9% just to get the amount of super that you would have if you didn't sacrifice anything, and over 9% to get ANYTHING more into super than you would have without sacrificing. Obviously while you're sacrificing, your OTE and therefore your after-tax takehome is also being reduced. Read http://www.ato.gov.au/nonprofit/content.aspx?menuid=0&doc=/content/38336.htm&page=6&H6 carefully, and pay attention to the example at the end. If you're salary sacrificing, make sure you have a written agreement that your employer will still continue to make employer contributions equivalent to the super guarantee that would have been payable - some people I know have just found this out to their detriment - they've been sacrificing super, and have been hit with "you didn't negotiate to keep the 9%". So they've received both less pay and less super.
You lose in GP's scenario above but important to also consider a lower income tax rate & the potential for higher interest growth on the upside.
It applies to any level salary. If you were earning $38,000 a year plus super, you're getting a super guarantee payment of $3420pa. You're being taxed at the following: First $6000 - 0% $6001 - $37000 - 15% $37001 - $38000 - 30% Plus Medicare of 1.5%. Won't go into the nitty gritty of health fund discounts, flood levies, HECS etc. OTE is $38,000, package is $41,420, takehome pay per annum is $33,008 after tax & Medicare (according to http://www.ato.gov.au/scripts/taxcalc/calc_standard_hire.aspx) So take home is $33,008 and super contributions are $3420. Now if you salary sacrifice 3% ($1140 before tax), and get caught by the employer taking advantage of the minimum obligations: OTE is reduced to $36,860, package is reduced to $40,177 ($36,860 plus 9%), takehome pay per annum is $32,232. So take home is $32,232 ($776 worse off) and super contributions are now only 9% of $32,232, or $2901 ($519 worse off). This only applies if your employer takes advantage of "the letter of the law" and only pays their minimum super guarantee obligations - which was calculated at 9% of your reduced OTE, and further reduced by the $1140 you contributed yourself.
Unless you're retiring in the nearish future you'd be pretty game to be salary sacrificing into super anyway. Who knows what the rules are going to be by the time I'm getting anywhere close to retiring!
I've applied salary sacrifice arrangements for many clients and have always given the instruction to renegotiate the Super Guarantee component with the employer first. Never had a client who was unsucessful other than government jobs and even then it differs for different departments.
As I said in the last line of the first post - I know some people that were just caught out by this (private sector).
GP There are always some out there willing to take advantage - with today's labour scarcity that's a very short sighted practice!
