Clients earning up to $61,920 in 2009-10 may believe that their most effective superannuation contribution strategy is to receive a Government co-contribution. However, depending on the client’s situation, salary sacrificing contributions alone or a combination of the two may provide greater net contributions.
A combination strategy
In many cases, it is likely that a client could benefit from a strategy involving a combination of salary sacrifice contribution and co-contribution. This is the case even with the salary sacrifice contribution counting as part of the client’s income in determining eligibility for the co-contribution. The challenge for particular clients is two-fold:
- determining the split between salary sacrifice contributions and co-contributions that maximises the client’s net contribution to super; and
- establishing whether that split makes practical sense for the client to implement given the quantum of both the financial benefit to the client and the non-concessional contributions (NCCs) needed to attract the co-contribution.
Take, for example, a person earning a salary of $50,000 who would like to use $5,000 of pre-tax salary to contribute to super. The options and their possible results are set out in Table 1.
The optimal split of contributions — between salary sacrifice and non-concessional/co-contributions — for a particular client depends on a number of factors. A relationship, as set out in formula 1 on page 28, can be established between the amount of pre-tax salary to be contributed to super and the proportion of that amount to be salary sacrificed to super provided two key points are observed:
- there is no change in the client’s marginal tax rate as a result of the salary sacrifice super contribution (ie, the salary sacrifice contribution does not reduce the client’s assessable income to fall into a lower income tax threshold); and
- the salary sacrifice super contributions are not excessive and therefore only subject to 15 per cent contributions tax.
If either of the above cannot be met, the relationship in formula 1 (see box) will not hold.
Analysis of this relationship for varying pre-tax amounts shows that, assuming the important point noted above, a strategy using a combination of salary sacrifice and non-concessional contribution (NCC) plus co-contribution will always result in higher net contributions than one involving salary sacrifice or NCC plus co-contribution alone. So is there a point at which such a strategy becomes impractical or unwieldy for the client to implement?
Example
Consider two clients — Abigail earning $40,000 income and Zali $60,000 income — who each want to use $5,000 of pre-tax salary to make super contributions. Their options and the results are set out in Table 2, which illustrates the net contributions arising under different contribution strategies.
For Abigail, the benefits of a combined salary sacrifice and NCC plus co-contribution appear clear: a potential $555 increase over the next most attractive option from a $3,933 salary sacrifice contribution and a $731 NCC.
However, Zali may consider that salary sacrificing the whole $5,000 is simpler and more efficient than salary sacrificing $4,906, leaving only $64 after income tax to make a NCC for a $64 co-contribution. The results for a particular client will depend on how much pre-tax income they plan to contribute to super and their income level. With this in mind, some clients may be more inclined to choose either a salary sacrifice only or a co-contribution only strategy.
One or the other
While salary sacrifice super may be perceived as a strategy more appropriate for higher income earning clients, lower income clients may also find it provides greater net super contributions than a strategy using co-contributions. This is particularly the case for the financial years from 2009-10 to 2013-14 inclusive, when the maximum co-contribution is temporarily reduced.
If the client is eligible for the co-contribution but is on the 15 per cent marginal tax rate (ie, with income of $35,000 or less), the co-contribution will always provide greater net contributions than an equivalent salary sacrifice contribution.
A client eligible for the co-contribution and on the 30 per cent marginal tax rate (ie, with income of greater than $35,000 but less than $61,920) will have a better outcome using a co-contribution strategy only when their income is less than a certain level, as shown in Table 3. The level depends upon the client’s marginal tax rate (assumed here to be 31.5 per cent), the amount of non-concessional contribution they plan to make and the co-contribution rates and thresholds.
For a client on the 30 per cent marginal tax rate who plans to make a $1,000 non-concessional superannuation contribution in 2009-10, the relevant income level is $54,710. This is determined as the income level at which:
- the net equivalent salary sacrifice contribution [$1,241 = $1,000 / (1 – 31.5%) x 0.85] exceeds
- the total net contribution plus co-contribution [$1,240 = $1,000 + ($1,000 — ($54,710 – $31,920) x 0.03333)].
Conclusion
Both salary sacrifice contributions and co-contributions are valuable super strategies for working clients with incomes of less than $61,920. Rules of thumb can guide clients and their advisers as to which may maximise net super contributions, but individual analysis and consideration of the practical implications of the various strategies must also be taken into account.
Deborah Wixted is senior technical manager at Colonial First State.
