Salary sacrifice

Bill is saving hard for retirement through the company superannuation scheme. The personnel manager asks him if he has thought about using the ‘salary sacrifice’ arrangement available to those earning over $60,000 a year and paying tax of 39 cents in the dollar.

Bill asks for more details. The personnel manager comes back with this outline:

1. Although the rate of income tax has risen to 39% for personal income above $60,000, the tax payable on employer contributions to super schemes remains at 33%.
2. The Government has decided that to encourage savings they are prepared for people to take advantage of this difference.
3. So if you like, you can arrange for us to decrease your taxable salary from $85,000 to $60,000 and we will pay the $25,000 into your account in the company's defined contribution super scheme.
4. The result is that $16,750 a year will be paid into your superannuation account ($25,000 less tax of 33%). Your take home pay is reduced by $15,250 ($25,000 less tax of 39%). You are better off by $1,500 a year until retirement or resignation.

The personnel manager says that there are some issues relating to ACC cover and tax on early withdrawal of the money. She gives Bill a paper with all the details.

While at first Bill hesitates at the idea of having less money in the hand each pay, he decides that the salary sacrifice option is the best chance he's got to make savings for his retirement. He takes up the offer - figuring the money he misses out on today will be the money he has to enjoy in his retirement.