A client posed an interesting question to chartered accountant GAIL FREEMAN: what’s better, personal superannuation contributions or salary sacrifice?

Nat wants to make some personal superannuation contributions, but her friend Kate reckoned she’d be better off to salary sacrifice.

She came to see what I thought.

I told her it was an interesting question.

“From a tax perspective, the amount of tax you pay and your net pay should be the same. So it is purely personal preference. I will explain the differences so you can make your own decision,” I said.

“The maximum amount that anyone can pay to superannuation without incurring excess contributions tax is currently $30,000. This is a combination of employer and employee contributions.

“Looking at your payslips, your employer contributes about $17,000 a year on your behalf, which leaves a balance of $13,000 available for you to contribute and get a tax deduction.

“If you choose to salary sacrifice this amount, your employer would reduce your pay by $500 a fortnight and then calculate your tax on the reduced amount. Your tax would reduce by about $195 a fortnight, which means that you would be making a superannuation contribution of $500 a fortnight, but your net pay would only reduce by $305 a fortnight.

“This is done each fortnight and you may have to pay a salary packaging company to process this for you each pay depending on your employer’s requirements.”

I told her that if she chose to claim a tax deduction, the process was quite different.

“You just make a payment or payments at any time during the year,” I said.

“If you make the full payment early in the financial year then the fund will be earning from the day that the contribution is made.

“However, you will not receive the refund until after your next year’s tax return has been assessed.

“Again, using a contribution of $13,000, your refund would increase by about $5000 or if you normally owe tax, your liability would reduce by about $5000.

“You need to advise your fund that you are making a member contribution that should be tax deductible and you will also need to fill in a form called ‘Notice of Intent to claim a Tax Deduction’. Your fund has to acknowledge receipt of this form.

“When you lodge your tax return you have to indicate that you have both provided your fund with a ‘Notice of Intent to claim a Tax Deduction’ and you have received an acknowledgement of this from your fund.”

I also told Nat that if her superannuation balance was less than $500,000 she might also be able to claim carry forward concessional contributions as a tax deduction.

“These are contributions that you did not maximise in the preceding five years,” I said. “You can obtain the available amount from MyGov, your tax agent or the ATO.

“I would suggest before making this type of contribution that you get professional advice. It is also important to maximise your current year contributions first before you make a carry forward contribution.”

“I should also remind you that some funds cut off receiving contributions in the current year in mid-June. So it is important if you want to get a tax deduction this year that you make any contributions promptly.”

Nat said: “Now I understand the difference between the two methods, I think that I prefer to make a personal contribution; I prefer that I can make the contribution at any time during the year.”

If you need advice on tax or superannuation contact the experts at Gail Freeman & Co Pty Ltd on 02 6295 2844, email info@gailfreeman.com.au or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.