Salary sacrifice vs personal deductible contributions to super

If you are an employee, there are two ways in which you can optimise the tax-effectiveness of your additional super contributions:

1. opt for a salary sacrifice arrangement, whereby your employer makes additional superannuation contributions beyond the compulsory superannuation guarantee (SG) amount from your pre-tax earnings and reduces your salary accordingly; or
2. make a personal contribution and claim a tax deduction when you submit your tax return.

Generally, higher income earners gain the greatest benefit from either of these strategies. Lower income earners may be better off not claiming the tax deduction and receiving a government co-contribution if eligible.

Which option?

For starters, employers don’t have to offer salary sacrifice. If they don’t, claiming a tax deduction on personal after-tax contributions is the only option.

You would need to set up a salary sacrifice arrangement with your employer. If your arrangement is not put into place until after you have performed the work, it may be ineffective.

From 1 January 2020, your salary sacrificed contributions are no longer able to be considered as superannuation guarantee (SG) contributions from your employer. This pretty much levelled out the playing field between salary sacrifice and tax-deductible personal contributions, but some subtle distinctions remain.

Let’s look at Jenny and Brian. They both earn $120,000 a year and want to contribute an extra $12,000 pa ($1,000 per month) to superannuation as concessional contributions. Jenny opts for salary sacrifice and will receive SG contributions based on her pre-sacrifice salary. Brian decides to make his own contributions and later claim them as a tax deduction.

Both will see their overall annual income tax bill[1] drop by approx. $4,500. After allowing for 15% tax (or $1,800) on the super contributions, they are each better off by $2,700 for the year.

The key difference is that Jenny will enjoy her tax benefit each payday. Brian needs to wait until the end of the financial year and submit his tax return before he can receive any benefit from his choice.

On the other hand, Brian’s regular pay will be more than Jenny’s as his gross income remains at $120,000 pa compared to her $108,000. This gives him more flexibility. For example, he can wait to make his entire contribution just prior to the end of the financial year – if he hasn’t been tempted to spend it in the meantime. However, if he makes regular contributions to his super fund, his net disposable income each month will be lower than Jenny’s. Only when he receives any tax refund might they be back on equal terms.

Beware the rules

While the greatest benefit of extending tax deductibility on personal contributions goes to employees who are unable to access the salary sacrifice option, it’s still a positive move that provides everyone with flexibility and choice.

However, whether you opt for salary sacrifice or claiming a tax deduction on personal contributions, there are rules to be followed, including observing the contribution cap levels or maximum amounts you are allowed to contribute each year. Talk to your financial planner about the best superannuation contribution strategy for you.

[1]  FY 2021-22, Including Medicare levy and Low and middle income tax offset (LMITO).