Salary sacrifice contributions¶

Salary sacrifice is an arrangement between an employee and their employer. The employee agrees to give up part of their before-tax salary, and the employer pays that amount into the employee's super fund instead of paying it as wages.

Because the money goes in before tax, salary sacrifice is a way some people choose to add to their super. It is set up with the employer, and there are a couple of rules to keep in mind. This lesson walks through both.

In one line

Salary sacrifice is an arrangement to send part of your before-tax pay into super. It is a concessional contribution that counts towards the concessional cap.

Why this matters¶

Salary sacrifice is one of the main ways an employee can grow their super beyond the compulsory employer contributions. Moneysmart explains that paying before-tax money into super can be a tax-effective way to save, because the contribution is taxed in the fund at a concessional (lower) rate rather than at the person's own income tax rate. But it is an arrangement to set up properly, and the yearly cap still applies — so it helps to understand how it works before starting one.

What you will learn¶

What a salary sacrifice super arrangement is
Why salary sacrifice contributions are concessional and count towards the cap
That salary sacrifice cannot reduce the employer super guarantee base

Understanding the concept¶

In a salary sacrifice arrangement, an employee agrees with their employer to have part of their before-tax pay paid into super rather than received as take-home wages. The employee and employer agree to this in advance.

These are concessional contributions. The ATO uses concessional for contributions made from before-tax money. As Moneysmart explains, because the money has not yet been taxed as income, it is instead taxed inside the super fund at a concessional (lower) rate set by the ATO — which for many people is lower than their own income tax rate.

Salary sacrifice contributions count towards the concessional contributions cap — the yearly limit on before-tax money going into super at the concessional rate. Importantly, employer contributions count towards that same cap. So the compulsory super guarantee, any extra employer super, and salary sacrifice all share the one concessional cap. This is why it is worth watching the cap: it is easy to forget that salary sacrifice adds on top of the employer amounts. See the caps lesson for how the cap works and what happens if it is exceeded.

There is one more rule to know. Since 1 January 2020, salary sacrifice cannot reduce the employer's super guarantee base. The ATO explains that an employer must still work out the compulsory super guarantee as if there were no salary sacrifice arrangement, and the sacrificed amount cannot count towards the employer's super guarantee obligation. In other words, salary sacrifice is on top of the compulsory super, not instead of it — it does not reduce the earnings the employer's super is worked out on.

For accountants & bookkeepers

Before 1 January 2020, some arrangements let sacrificed amounts reduce the base the super guarantee was calculated on, and let those amounts count towards the employer's obligation. From 1 January 2020 the ATO closed both. The super guarantee is now calculated on the ordinary time earnings base — which includes amounts the employee sacrifices for super — and sacrificed contributions do not count towards the amount the employer must contribute to avoid the super guarantee charge. Treat salary sacrifice as strictly additional to the compulsory super guarantee.

Example¶

Mia wants to add to her super. She talks to her employer and they agree to a salary sacrifice arrangement: each pay, a set amount of her before-tax pay goes into her super fund instead of into her wages.

That sacrificed amount is a concessional contribution, so it counts towards Mia's concessional cap for the year — alongside the employer contributions her employer already makes. Her employer still works out the compulsory super guarantee as if the sacrifice were not there, so the salary sacrifice sits on top of, not instead of, her super guarantee. Mia keeps an eye on the cap so the arrangement stays within the yearly limit.

Common mistakes¶

Setting up salary sacrifice informally — it is an arrangement to agree with the employer, ideally in advance and in writing.
Forgetting the concessional cap covers employer super and salary sacrifice together.
Assuming salary sacrifice can replace the compulsory super guarantee — since 1 January 2020 it cannot reduce the employer's super guarantee base.

How this works in myaccountant¶

In the app — myaccountant sets up an employee's salary sacrifice as a pay item on the pay run. Each pay, it works out the sacrificed amount alongside the employer super, pays both the employer and sacrificed contributions to the employee's fund, and reports them so the amounts appear against the right employee.

Key points¶

Salary sacrifice is an arrangement to send before-tax pay into super.
It is a concessional contribution, taxed in the fund at a concessional (lower) rate.
It counts towards the concessional cap — along with employer contributions.
Since 1 January 2020 it cannot reduce the employer's super guarantee base.
Set it up with the employer, and watch the cap.

Learn next¶

General information only — not tax, super or financial advice.

Did this answer your question?