Salary sacrifice – save tax and boost savings

With this strategy you can reduce your income tax and boost your long-term super savings at the same time.

Sacrificing pre-tax salary into superannuation is one of the most simple and tax-effective ways you can generate long-term wealth for retirement. Rather than receiving salary or wages on which you would have to pay tax at your marginal rate (which could be as high as 48.5), you may be able to negotiate with your employer to have an equivalent amount contributed to a super fund.

The advantage of this strategy is that super contributions are taxed at only 15 (plus an additional surcharge of up to 15 for higher income earners). That means you end up with a higher after- tax amount invested .

How does the strategy work?

Not only can salary sacrificing into super be a great strategy with your regular salary, it can also be an especially efficient way to invest a bonus payment.

In order for a salary sacrifice arrangement to be valid, it must be 'prospective' in nature (i.e. you can only sacrifice income as it relates to future performance). This means for regular salary, the agreement to salary sacrifice should commence on the first day to which the next pay period relates.

You may only salary sacrifice a bonus payment to which you have no pre-existing entitlement. In other words, as long as an agreement to salary sacrifice is in place before your employer determines the bonus, the arrangement will be effective for tax purposes. In practice, the arrangement can be made as late as the day before your employer determines the bonus entitlement.

In both cases, it's important to have the agreement thoroughly documented and signed by both parties before the entitlement exists.

The Benefits

• This strategy allows you to increase your super savings in a tax-effective manner. If you are on the top marginal tax rate, this can mean the difference between investing up to 85% of your salary compared to 51.5% if you invested your after-tax salary.

• This strategy is particularly useful if you are nearing retirement and want to maximise your superannuation benefits.