Salary sacrificing and after tax contributions are a couple of ways you can contribute to your super savings to help it grow faster. In this video, we’ll break down what this all means, and why you would ever want to do it.
Heads up, this section gets a bit more complicated. If you have any questions, please don’t hesitate to ask.
Please be aware, this is general advice and does not take into consideration your personal situation. Please see your Certified Practising Accountant or a licensed financial adviser to determine what is appropriate for you.
Compulsory employer contributions
In this video, we're going to look at how you can add money to your super to help it grow faster. Please remember, this is general advice. See your financial advisor or accountant to determine what is appropriate for you.
Before we look at how you can add more money to your super, let’s quickly recap how money gets into your super. If you're being paid a salary by your employer, your employer must contribute to your super savings an amount equal to at least 9.5% of your salary. This is called a 'compulsory contribution' and is required by law.
The few exceptions to this are:
If you earn less than $450 a month
If you're under 18 and work less than 30 hours a week; and
In some cases, if you're a contractor.
When you get paid, you should always check your payslip to make sure that your employer is making these compulsory contributions. Remember, your super is your money, so it must be paid to your fund.
On top of compulsory contributions, you can also pay extra money into your super. If you do, this is referred to as a 'voluntary contribution'. Why would you want to do this? There are three key reasons to top up your super:
First, you might not think that your compulsory contributions will be enough for you to enjoy the retirement lifestyle you want.
Second, your super fund exists to invest and grow your money. If you think they're doing a great job, you may want them to manage more of your money for you.
And third, anything you earn in your super is taxed at a lower rate than your own investment income.
Then, there are two ways you can make voluntary contributions. The first is through what's called a 'salary sacrifice'. This is where you voluntarily contribute more of your income into your superannuation. For example, if the minimum compulsory contribution is 9.5%, you may want to contribute a bit more, and boost it up to 12%.
The other way is to directly transfer money from your personal savings into your super savings.
The difference between these two types of contributions is tax-related. Salary sacrifice is considered before-tax contributions, meaning that the money you give to your super fund is taxed at a lower rate. The direct transfer of your savings into your super account is called an after-tax contribution, as you are putting money that you've already paid income tax on, into your super fund.
Regardless of how you contribute, be aware that you can only transfer up to a certain amount before you become heavily taxed.
Should you always make voluntary contributions?
Not necessarily, as it depends on your personal situation. Don’t forget that when you put money into your super, you won’t be able to get it back until you’re 60. You may want to use your money for other things.
To see how your contributions can make a difference to your retirement income, try out our super calculator in Unit 8. As you're playing around with that, you may start to wonder: "How much super is enough?" In Unit 9, we will help you understand how much is enough for you.
Update: Tax deductions on voluntary contributions
While some people can salary sacrifice, there will be some who can’t, usually if they work for an employer who won’t let them salary sacrifice super contributions.
As an alternative, you can claim a tax deduction on your after-tax contributions. This reduces the tax paid on these contributions, so they are effectively treated the same as salary sacrifice contributions.
For more information, talk to your Certified Practising Accountant or a licensed financial adviser.