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Sunday, 23 August 2009

How to Reduce Taxes with Salary Sacrifice

A great way to reduce your tax burden is to salary sacrifice into your superannuation fund. This is not for everyone because some people need to maintain high take-home pay to sustain their lifestyles. Money going into super is taxed at 15 per cent. Your income between $6,000 and $35,000 is taxed at 15 per cent. Hence it only makes sense to salary sacrifice into super once you earn over $35,000 and you're taxed at 30 per cent on each additional dollar.

To use an example, a person earning $46,000 a year can salary sacrifice $11,000 so his taxable income is $35,000. This means the maximum amount he is taxed is 15 per cent. He saves $2755 and sacrifices only about $200 to $300 per fortnight in take-home pay. Saving $2755 per year may not seem like much but if we assume this person is aged 25 and will retire in 40 years and if we also assume the super fund can give a return of 7 per cent per year then this $2755 will become $41,254 during retirement.

There is a limit to salary sacrifice. Recent changes by the Rudd Government mean that the maximum you can salary sacrifice is $50,000. Once you earn over $85,000 then you will have to think up another way of reducing tax. One possible way is negative gearing. But we'll cross that bridge when we get to it.

Some people argue that salary sacrificing your money into superannuation is a bad idea because you reduce your take-home pay and your money in super is locked up till you at 65 years old. I believe that this is only a problem for me if I urgently need the money for something, e.g. if I were unemployed or if I needed money for medical treatment. However, if you are suffering from financial hardship, you can submit a form with APRA to take money from your super fund under compassionate grounds (see Super Rules That Will Save Your Mortgage). In fact, salary sacrificing into super is a better idea if you want to protect yourself against emergencies because the amount you save on taxes will allow you to save up more quickly. If you do need to access your super for emergencies, if you have salary sacrificed, you will be able to access more money because you have saved on taxes.

Another argument someone made to me was that you are better off sacrificing the extra tax and getting money in your hands because you may be able to invest the money better yourself than rely on your super fund to do it. For example, you may believe it is a better investment to buy an investment property. But this assumes that you cannot invest in property through superannuation. You can by setting up a self-managed super fund (SMSF). Putting money into super doesn't affect the assets you invest in. The main difference between money in super and outside super is the tax treatment.

1 comment:

Mortgages in Australia information said...

Hello. To put it basically positive cashflow properties generate more income than all their expenses, so you put money in your pocket every week. Negative cashflow properties have more expenses than income so they cost money every week