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Take the cash or salary sacrifice?

If you’ve ever been lucky enough to receive a cash bonus from your boss, it may have come as an unpleasant surprise to see a significant chunk of it handed over to the tax man.

In future, a smarter option may be to take advantage of salary sacrifice rather than take the cash. Why? Because it could boost your super and reduce the tax you hand over to the ATO.

A salary sacrifice arrangement is when you agree to receive less take-home pay from your employer in return for benefits paid out of your pre-tax income. These benefits can include tax deductible goods and services, like a car or laptop, or contributions to your super account.

Why salary sacrifice?

Salary sacrificing is based on the premise of making better use of your extra cash. That is, cash you don’t need to rely on for a particular purchase or for supporting your day to day living expenses. 

A cash bonus or reward paid by your boss is an example of extra cash that could be used more effectively when salary sacrificing it into super.

For those who decide to take the cash bonus, they will pay the marginal tax rate (up to 47%), however if they decide to salary sacrifice it to superannuation (so long as you are within your concessional contributions cap) you will be taxed at a flat 15%. 

Concessional contributions

The annual concessional (before tax) contribution cap is currently $27,500. That means in addition to your employer’s super guarantee contributions (currently 10%), you can contribute via salary sacrifice any extra cash up to your cap of $27,500 per year. In doing so, those contributions will benefit from the much lower 15% tax rate.

Once the amount you wish to salary sacrifice has been paid to your super fund, it leaves you with a lower gross income amount. You will be taxed on that new, and lesser, gross amount at the appropriate tax rate, which could very likely mean your net, or take-home pay, is proportionately more.

Of course, when it comes to superannuation, salary sacrifice and tax benefits, a number of conditions apply, particularly if your salary exceeds $250,000 or your superannuation balance is equal to or greater than $1.7 million.

Other considerations

Salary sacrificing to super may also be a tax effective strategy for money received as an inheritance or on the sale of an asset such as a rental property. If by chance you happen to win a lottery, salary sacrificing some of it into super may prove a worthwhile course of action as well.

However, as mentioned earlier, salary sacrificing is a wise option only when you won’t miss the cash in the near term. Before committing your extra cash to super, it’s important to consider whether you will need access to surplus cash before you reach ‘preservation age’, or the age at which you can begin to access your super (somewhere between 55 and 60 depending on your year of birth).

Your liquidity needs will depend on your individual circumstances, so it’s important to consider your options wisely. The timing of your retirement and how much you’ll need to retire in comfort are other considerations.

Next steps…

Speak to us to find out how salary sacrificing could help you to grow your personal wealth, and in particular your retirement saving. Then if you agree you have extra cash that you don’t rely upon, we can determine the salary sacrifice amount per pay cycle so you may advise your employer’s payroll manager or HR department.

For help navigating your financial future and how to GROW your retirement savings, please contact Blue Harbour Financial Partners on 07 3821 1161 or email office@blueharbour.com.au.

At Blue Harbour, we are known for helping everyday Australians to PLAN and GROW their personal prosperity, PROTECT what’s important, and RETIRE to the lifestyle of their choice.

Blue Harbour Financial Partners and its advisers are Authorised Representatives of Fortnum Advice Pty Ltd ABN 52 634 060 709 AFSL 519190. This article is general advice only and does not take into account your objectives, financial situation or needs. Please consider your own circumstances and whether the advice is right for you before making a decision. Always obtain a Product Disclosure Statement (PDS) before making any financial decisions in relation to acquiring a product.

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