News 05/06

Super Concepts e-SuperUpdate provides you with technical tips and updates on Self Managed Superannuation Fund topics of interest.

In the previous edition of e-SuperUpdate we saw how useful a transition to retirement pension can be for those of us who have reached preservation age, usually age 55. In this edition we will look at the use of salary sacrifice to superannuation and how it can be used successfully where you may wish to commence a transition to retirement pension.

Salary Sacrifice

Salary sacrifice is where you make an agreement with your employer to forego some of your salary in exchange for them providing a benefit. For example, you may wish to salary sacrifice so your employer can contribute to superannuation for you, provide you with a car or pay fees on your behalf. Depending on the benefit you recieve it may be subject to fringe benefit tax. Employer contributions to superannuation that are part of your salary sacrifice are not subject to fringe benefit tax.

The tax rules permit you to salary sacrifice providing any agreement you enter into is prospective. That is, you can only salary sacrifice income you will earn in future and not income you have earned. The amount that you can salary sacrifice is between you and your employer. However, you are not permitted to salary sacrifice below amounts that are required to be paid to you as cash salary under any agreement or industrial award under which you are employed. For example, an employer may have a policy not to let you salary sacrifice below a particular percentage of your remuneration package.

Remember Fred and Wilma from our last edition of e-SuperUpdate? Fred was employed by his own company with a salary of $60,000 and Wilma was employed by a local business on a salary of $65,000. Wilma's employer provides salary sacrifice as part of her remuneration package.

Wilma has discussed salary sacrifice with Fred and has decided to salary scrifice $10,000 of her remuneration package to superannuation for the 2005/06 tax year. Let's look at what this will mean for Wilma:

Wilma's Salary Sacrifice 

Tax Savings for Wilma

If Wilma salary sacrifices to superannuation she will be in a better overall position as after salary sacrifice she will have $8,500 in superannuation and recieve a salary of $42,640. This means she will reduce the amount of tax she pays overall from $15,360 to $13,860.

Salary Sacrifice and Fred

If you remember from the last edition of e-SuperUpdate Fred's manufacturing company contributed the maximum tax deductible amount of $100,587 to superannuation for him. It is not worthwhile for Fred to salary sacrifice any more than his age based tax deductible amount for superannuation as his company will not recieve a tax deduction for any excess.

Salary Sacrifice and Transition to Retirement Pensions

By combining a salary sacrifice strategy and commencing a transition to retirement pension a number of benefits can be obtained. The main benefits include:

• reducing the overall tax burden on a remuneration package as we saw in Wilma's situation;
• tax free income and capital gains on the investments in the superannuation fund that are used to provide the pension; and
• a tax rebate of 15% on the taxable value of any pension.

Let's look at Fred's situation. In the last edition of e-SuperUpdate we saw that Fred wished to reduce the hours worked yet continue to recieve an income of $60,000 before tax. He did this by reducing his salary to $30,000 and commencing a non-commutable allocated pension pf $30,000 p.a.

Tax on Fred's Salary and Pension

By commencing a non-comutable allocated pension Fred recieves an increase in net income of $4,500.

Let's look at what happens to Fred's account in his superannuation fund. Now that Fred has commenced a pension his superannuation fund will set up a pension account to pay Fred's non-commutable allocated pension and an accumulation account to accept contributions. Remember that Fred only needed to use $570,000 of his accumulated superannuation to pay a pension of $30,000 not the whole balance in his account of $600,000.

At the end of the first year after the non-commutable allocated pension has been paid Fred will have a balance of $655,499 in his superannuation fund. The income and capital gains on investments used to support Fred's pension account will be tax free.

Benefits

• Fred is able to reduce the overall tax paid on his remuneration package by salary sacrifice to superannuation
• No fringe benefit tax is payable on salary sacrifice to superannuation
• Fred reduces his working hours and has a better quality of life
• The tax Fred pays on the income recieved is reduced by $4,500
• Fred has more to live on after tax and yet recieves the same income as he did before the commencement of the non-commutable allocated pension
• The income and capital gains on the investments used to provide the pension in Fred's self managed superannuation fund are tax free
• Fred's overall balance in his superannuation fund actually increases

In the next edition of e-SuperUpdate we will have a look at the advantages of splitting superannuation contributions between spouses.