Beware the salary sacrifice trap

The Federal Government announced numerous proposals in the budget presented on 8th May 2012.

One of these was the deferral of allowing individuals with superannuation balances under $500,000 to contribute more than $25,000 into super until 1st July 2014. In the 2010 budget they announced this would apply from 1st July 2012.

What this means

It means no one regardless of age can contribute more than $25,000 p.a. into super as a personal deductible contribution if you are self employed or through salary sacrifice and employer contributions if you are employed. If you exceed this contribution limit the excess will incur an additional 31.5% tax on top of the 15% concessional rate of tax applied.

This could be a trap for anyone who is currently salary sacrificing more than $25,000 per year or if your combined employer contributions and salary sacrifice contributions into super are greater than $25,000 per year.

What to do

It is the individual's responsibility to ensure they do not exceed the contribution cap limit. The super fund or your employer is not responsible for ensuring or alerting you to the possibility of exceeding the contribution cap limit. Diligent and informed employers will of course keep employees up to date with the changes and many super funds will send out courtesy warning letters when a member is approaching this cap limit.

From the 1st July 2012 you need to adjust any salary sacrifice contributions you make so that the total for the year plus your employer's contributions do not exceed $25,000.

Any amount above this limit of $25,000 that you have previously been sacrificing into super will now be paid to you as normal salary again less a higher rate of marginal tax. You can still contribute this salary after tax into super as an after-tax contribution. The government has not changed the limit on after-tax contributions and these remain at $150,000 per year that an individual can contribute to super tax free.

If you are still a long way from retirement this may be a less attractive proposition as it creates more of a level playing field to compare investing your after tax salary in other investments outside of super or to use in reducing debts and mortgages.

What ever you decide, just don't fall into the trap of continuing your salary sacrifice arrangement if it results in more than $25,000 being contributed to your super from 1st July 2012.


Rob Bourne has been involved in the financial services industry for over 35 years. As a practising financial adviser he focuses on the need for practical and down to earth financial education. The aim is to educate people through financial education so they can take control of their own financial future. Visit Rob's website here for more information on business opportunities, investing and financial education or the complete guide to superannuation a...

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