Case study

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.

Source: AIA

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Mike’s case

Mike and Terri are both aged 38 and have three children under six. Mike earns $100,000 a year and Terri and the children rely on his income. They have a $300,000 mortgage and know they are taking a big risk not having life insurance. However, they rely on every dollar Mike earns and don’t think they can afford the premiums.

They discuss their circumstances and needs with a financial adviser and agree that ideally they need about $1.6 million dollars of cover. This would include funds for Mike’s medical and funeral expenses if he got very ill and died, paying off the mortgage and providing an income for Terri and the children. Mike is charged a premium of about $3,500 in the first year.

Their adviser shows them how they can afford the premiums by arranging the cover in superannuation and salary sacrificing the premiums. The table shows their expenses are $40,000 a year and have a very small surplus at present (insufficient to meet the insurance premium). Mike would need to salary sacrifice $4,117 (to allow for the 15% tax in superannuation) but this would reduce the amount of income tax he pays and maintains some of their surplus as well as paying for the necessary life cover.

The need for review

This case is based on Mike and Terri’s circumstances today. What if they had another child or received an inheritance? Next year the premiums will be higher because Mike is a year older – will they still need the same level of cover? Mike’s employer will be paying into superannuation for him and as his account grows he may need less cover.

Some types of insurance are treated differently when held in a super fund and there is a range of issues to consider, so it’s important to seek professional guidance from your financial adviser first.

Disclaimer: The Case study in no way suggests that a single income family earning $100,000 with a $300,000 mortgage requires $1.6M of insurance and should your circumstances be similar an individual review of your needs is still required.

Sources: www.ato.gov.au

Disclaimer

If you would like to learn more about how you can cut the cost of insurance please contact our expert Risk Management Advisors.
Call (02) 4926 2300 or email us.

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Spouse contributions

The spouse super tax offset allows higher earning taxpayers who contribute super for their non-working or low income earning partners to be eligible for a tax break.

To be eligible for this benefit the lower earnings spouses’ income, total reportable fringe benefits, and reportable employer superannuation must have been less than $13,800 in the financial year.

Salary sacrifice

A salary sacrifice arrangement is where an individual agrees to forego part of their future salary or wages in return for their employer providing benefits of a similar value. Salary sacrifice contributions count towards an individual’s concessional contributions cap.

Government co-contributions

The Government co-contribution scheme is an initiative for Australians to make a bigger commitment to their super savings and to give individuals more money to add to their superannuation fund.

Eligible Australians who earned less than $33,516 in the 2013/2014 financial year will receive 50 cents for every dollar, up to a maximum of $500, of after-tax money that they contribute to their super account.

Individuals who earn over $33,516 will have their Government co-contribution reduced by around three cents for every dollar over that amount, up until it reaches zero at $48,516.

To be eligible individuals must under 71 years, and make at least one personal super contribution and be a permanent resident or citizen.

Concessional contributions

The 2014-15 financial year will see an increase in the concessional contributions cap. The present cap of $25,000 will increase up to $30,000.

The indexation will not apply to the temporary higher cap of $35,000 currently available to those individuals 59 and over as at 30 June 2013 (for 2013-14). However, the temporary higher cap will extend to individuals who are 49 and over as at 30 June 2014, and will apply for the 2014-15 financial year.

Non-concessional contributions

The indexation of the concessional contributions caps has some flow-on effects the non-concessional contributions cap. Therefore, from 1 July 2014 the non concessional contributions cap will increase from $150,000 to $180,000.

Call the team at Leenane Templeton if you wish to discuss super contributions further.

Disclaimer.

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