Despite the effects of the Global Financial Crisis on superannuation, a definite trend for employees to request salary packaging for their superannuation has been identified.
Over the last year, more of his clients with small to medium sized businesses were incorporating superannuation into employees’ salary packaging arrangements than ever before.
The cost and effect of incorporating superannuation in salary packaging arrangements is the same for employers, but employees clearly benefit, by putting money into their superannuation from their pre tax earnings.
In fact, taking into account Federal Government extra special exemptions over recent years to encourage this form of salary packaging contribution, the number of Australians taking advantage of it have increased dramatically, with this being the most popular form of salary packaging today.
Salary packaging allows employees to reduce their annual tax bill to pay for everyday goods and services, with no risk to the employer. All payments are made before tax is paid, thereby reducing the tax account at the end of the financial year.
Employer super contributions are taxed at a flat 15% (equal to the lowest marginal rate of tax), and therefore the sacrificed amount could be more favourably taxed than if taken as cash salary.
While there are no changes or implications of this arrangement to the employer, the employee needs to be aware that he/she cannot claim deductions or tax offsets for salary sacrifice contributions. This is because the employer is considered to have made the contribution.
A salary sacrifice contribution is not considered a fringe benefit tax, and is therefore not subject to fringe benefits tax.
Up to $25,000 can be received as Concessional Contributions, and up to $50,000 for employees aged 50 and over, until July 2012.
The benefit of investing in superannuation, provided the tax rate on the income is more than 15%, is that the total of money invested is greater, because it is tax deductable.
For example, if you have $10,000 of income and are taxed at 38.5%, you will have $6,150 to invest after tax. If you can structure your affairs so you can claim a tax deduction for contributing the same $10,000 to superannuation, you will have no tax to pay on this $10,000, and the super fund will pay tax of 15%, leaving you with $8,500 to invest within super.
By investing the same amount of income in superannuation in a tax efficient way via concessional (tax deductible) superannuation contributions, instead of investing it outside of superannuation, you will significantly increase the after-tax value of this same amount of income invested. This is a result of the compounding effect of a greater amount of capital invested due to tax savings.