Reducing the amount of tax you pay can be quite simple.
Just ask Richard Hatch, the first ever winner of US reality show Survivor, he didn’t bother paying any on his million dollar winner’s prize.
Quite simple, but getting away with it was a little harder – Hatch went to US Federal Prison for tax evasion.
In Australia, if you want to reduce tax – without the prison sentence – salary sacrificing part of your pre-tax income into superannuation can be a simple option.
The benefit of undertaking this strategy is that the sacrificed income – normally taxed at your marginal rate – would be taxed at the superannuation tax rate of 15%.
Take Paul, who is 50 years of age and has a salary of $100,000 per annum, he is considering two options:
• Taking the entire amount as cash salary; or
• Taking $85,000 as cash salary with $15,000 contributed to superannuation. If Paul sacrificed $15,000 of his salary into superannuation, the tax he would pay on that amount would drop from 37% to 15%.
The net amount contributed to Paul’s superannuation would be $12,750 ($15,000 less 15% tax).
In comparison, if he were to receive this amount as salary, he would receive $9,450 ($15,000 less 37% tax).
Paul would have an additional $3,300 contributed to superannuation, compared to what he could have taken in salary and the benefits of salary sacrifice are optimised over time because of superannuation’s 15% tax rate.
It should be noted Salary sacrifice and employer contributions are subject to annual contribution limits.
$25,000 for under 50’s and $50,000 for over 50’s (until 30 June 2012) and exceeding these limits significantly reduces the benefits of salary sacrificing due to excess contributions tax which is 46.5%.
Don’t forget though, you can’t access what you’ve sacrificed until your retirement – after age 55 or for those born after 1 July 1964, age 60.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL / ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we think we’re Australia’s top financial adviser. We think we’re the best financial advisers in Tasmania.
