Should Low Income Earners Salary-Sacrifice for their Super Funds?

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Salary sacrifice refers to the strategy of using your pre-tax salary to meet certain financial obligations. You can salary sacrifice on a vast array of items although some of these will attract a Fringe Benefit Tax (FBT) and may not be acceptable to your employer.

Some of the work-related items that you can salary sacrifice on without attracting an FBT include superannuation contributions, tools of trade, computer software and electronic devices among others. Superannuation is one of the common salary sacrifice candidates as it makes your salary travel much further in meeting your financial goals. Not only does it minimize your taxable income by the amount you salary sacrifice, it allows you to enjoy the tax-effective benefits (concessional tax rates) for the super contributions.

But is salary sacrifice for super contributions ideal for everybody? The number one reason many opt for salary sacrificing is the lower concessional tax rate of 15%. Australians pay a marginal tax rate ranging from 0% for those earning less than $18,200 to 47% for those that earn more than $180,000.

If you are earning less than $18,200, salary sacrifice may not be the most prudent route for saving for your retirement as the super contribution will attract an entry tax of 15% when you are already enjoying a tax-free threshold. In such a case, you will be better off making a $1000 non-concessional contribution so as to get $500 in co-contribution from the state.

The Low Income Superannuation Tax Offset

The low income superannuation tax offset (LISTO) is an initiative of the Federal Government aimed at helping low earners boost their retirement benefits. LISTO provides low income earners with a refund for the 15% contribution tax that they have to pay on their concessional super contributions.

To be eligible for a LISTO, a taxpayer must be earning less than $37,000 annually and mustn’t have been a temporary Australian resident for tax purposes for any part of a financial year. They will receive a refund for the concessional contribution tax they pay on their super contributions including the salary sacrifice contributions, personal deductible contributions and the Super Guarantee (SG). The maximum benefit amount that you can receive in a single year is capped at $500 and is paid directly into your superannuation account. To receive their LISTO entitlement, low earners don’t have to submit their tax returns. The amount is automatically calculated by the Australian Taxation Office based on the data that they have collected from your employer and superannuation fund.

Government Co-contribution

This is another superannuation savings options that is available for all low-income earners. The government’s co-contribution scheme rewards low income earners when they make after-tax contributions into their superannuation funds. Contributors can earn a maximum benefit of $500 per financial year which is paid directly into their super fund. If your annual income for 2018-9 is at most $37, 697, you will get the highest co-contribution payment of $500 if you make a contribution of $1000 per financial year.

Like in the LISTO, you won’t have to grapple with any paperwork in order to get a co-contribution. The Australian Taxation Office will do all the donkey work and pay the amounts directly into your super fund.

However, several details have to check out for you to be eligible for a co-contribution scheme:-

  • You must have made personal non-concessional (after-tax) contributions into your superannuation fund which do not exceed the annual contribution limits.
  • At least 10% of your assessable income is either from employment or self-employment.
  • You must lodge your tax returns
  • You must have provided your Tax File Number (TFN) to your superannuation fund.
  • The age limit requirement: To qualify for a LISTO, a taxpayer must be aged less than 71 years of age at the end of the financial year.
  • You must never have been a temporary Australian resident in any period during the financial year.
  • Your total superannuation balance in all your super accounts must be less than $1.6 million during the 2018-9 financial year.

The Australian Taxation Office will take a look at your income and the concessional (after tax) contributions in order to compute the payment due to you. This will subsequently be sent directly to your super account. Want to figure out how to make the most of your super on a low income? Talk to a professional accountant Melbourne expert to help you make sense of your options.

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