For some employees, the New Year marks the end of their company’s 2015 employee performance period and possibly a bonus payment. If you are fortunate enough to have an employer bonus payment to look forward to, you may have some tax savings options up your sleeve.
Imagine your employer declares a $30,000 bonus payment in recognition of your performance during 2015. Your manager formally advises you of your bonus entitlement on 1 March 2016. Given the healthy state of your finances, this will be surplus cash and will end up in your savings account, earning small amounts of interest.
Rather than having the entire bonus paid into your bank account, why not consider salary sacrificing part of the bonus into your superannuation fund? While it could save you a chunk of tax, trick is to make the decision about salary sacrificing part or all of the payment before the bonus amount is declared.
Why salary sacrifice a bonus payment into super?
Primarily, it will save you tax but it will also boost your super balance.
So in this example, you might opt for half of the bonus to be paid into your bank account and the other half to be paid into your super fund in accordance with a ‘salary sacrifice’ agreement.
To give you an idea, the tax saving on a $15,000 bonus payment salary sacrificed to super will be approximately :
• $3,600, if your 2015/16 income is between $80,001 and $180,000
• $5,100, if your 2015/16 income is between $180,001 and $300,000
• $2,850, if your 2015/16 income is over $300,000
By paying less tax, you get more bang for your buck. Assuming your taxable income is between $180,001 and $300,000, $9,900 of the bonus will go in your super fund after the 15 per cent super tax is deducted. That is going to be comparatively higher than what you would have received in net ‘take home’ bonus, if this had been paid directly into your bank account. This is because the bonus amount taken in cash will be taxed at your personal marginal tax rate as salary and wages. (eg if you were earning between $180,001 and $300,000 your net ‘take home’ bonus on this $15,000 portion of the bonus would only be $7,650).
Apart from providing a boost to your retirement savings, salary sacrificing your bonus payment may also help pay for the cost of any insurance that you might have in your super fund, or perhaps pay for your spouse’s personal insurance via a superannuation splitting strategy.
What’s the trade-off?
A key trade-off is that super contributions are locked away until you retire. So it must be money that you are prepared to immediately forego. You should get specialist advice, particularly if the bonus could have been used, for example, to make an extra loan repayment.
There is a bit of housekeeping required if planning to salary sacrifice a bonus to super:
1. You need to establish a salary sacrifice agreement with your employer before your entitlement to the bonus arises. This is very important; you cannot elect to salary sacrifice income that you have already earned. Also ask your employer what impact salary sacrificing has (if any) on how your super guarantee or other remuneration entitlements are calculated.
2. Be sure to keep track of the total amount contributed to your super fund each year. Any amounts salary sacrificed to super are added to the usual 9.5 per cent super guarantee and any other super contributions that your employer makes for you each year. The law requires you to keep the total of these contributions within annual ‘caps’ ($35,000 for individuals age 50 and over, otherwise $30,000 for everyone else) so you might not be able to salary sacrifice as much of your bonus as you would like to.
Boosting your bonus
So if you’re in line to receive a bonus this year and anticipate that part or all of it will be surplus cash flow, consider salary sacrificing it to your super fund to make the most of your hard earned dollars. You will need to weigh up the tax savings with the fact that the money will be locked away in your super fund until retirement.
Speak to your Leenane Templeton financial planner today on 4926 2300 for more information.