Is my salary sacrifice understanding correct?

Discussion in 'Superannuation, SMSF & Personal Insurance' started by mr_alex, 26th Feb, 2020.

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  1. mr_alex

    mr_alex Well-Known Member

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    my income is $70k and I want to s/s 15% into super,
    In my understanding, the government is paying me/letting me keep 17.5% (32.5%-15%) so if my average super fund return is 7.5% I am essentially making around 25% on my money,a but the 17.5 portion is not compounded??. - is this all correct? The dollar amount of the 17.5% is $1837, but an online calculator gave me a figure of $3500, could be this due to it being progressively taxed?
    Thanks for your help.
     
    Last edited: 26th Feb, 2020
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    So at present you earn $70K = $6650 super. You propose to sal sac so the super is $10500 (an extra $3850 super). Your salary will then be $3850 less ie $66150.

    In place of being taxed at your marginal tax rate of 34.5% (including medicare levy) the contribution would be taxed IN THE FUND at 15%.. I believe the total net tax savings are $750 pa on the increased amount. You will personally lose $3850 of income but that is offset by a personal tax saving 34.5% on the extra super ($1328) but the fund tax will be $578 (15%). Your net pay should reduce by $2522pa to have a net addition to super of $3272

    Ignore fund earnings as this is not a tax saving. Yes the earnings will compound for the higher amounts etc based on 85% of the extra sum.
     
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  3. mr_alex

    mr_alex Well-Known Member

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    Thanks for your detailed reply Paul.

    I am currently contributing a compulsory 5% from my after tax pay, plus 3% from my employer. There is an unfunded amount as well believe around 18% which is calculated from my years working and salary (I work in government)

    The $10,500 is what I would like going in there, so my Sal sac would = 10,500 minus the 5%
    I don't pay Medicare levy as my employer has their own health care

    Eventually I would like to be able to max out to the 25k per year limit, I am unsure what they include in the concessional cap, whether it is just the 3% funded portion or the unfunded portion as well. Thanks for your help
     
  4. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Makes no sense. All Australian taxpayers are liable to pay medicare levy. Employers are not exempt except ADF

    There is no 5%. There is a notional contribution for defined benefit affected people. The concessional cap may be more than 25k this year
     
  5. craigc

    craigc Well-Known Member

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    This sounds very similar to our db fund.
    The notional contribution amount and calculation for db funds contributions cap comes from the fund actuary. Check this % from the fund actuary to determine the deemed rate for excess contributions cap purposes.
    Don’t forget 5% after tax (most likely) becomes 5.88% if sal sacrificed due to 15% inwards super tax.
    Also if 5% Is compulsory (depends on your fund t&c’s) it ‘might’ be included as part of the deemed rate calculated by the fund actuary.
    In addition to all of the above, if the deemed rate calc from the actuary exceeds the $25k limit, for db funds it is considered to be equivalent of $25k contribution.
    In addition to Paul’s comments the Medicare doesn’t make a lot of sense.
    There is a huge amount of info here & assumptions from what you have commented if it is the same as our db fund. This may not be the case.
    I Strongly recommend you get some good financial advice from a fin planner who is familiar with db funds & can review your personal situation.
    Good luck
     
  6. mr_alex

    mr_alex Well-Known Member

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    Thank you Paul and craig, Il be contacting my fund to ask specifics,
    Yes I am in the ADF.

    The fund is a 'hybrid' fund, so it has both a contribution ( funded member benefit) and defined benefit ( unfunded employer benefit). I can roll over the member benefit to another fund if I leave the ADF before retirement but I cannot move the employer benefit. I believe the employer benefit works out quite generous if I stay until retirement, but I am unsure if I will at this stage. I will need to workout whether it is worth staying with current super as I am able to switch to another ADF fund or any fund of my choice and the ADF will contribute around 15%, you would know much more than myself on this, but I believe if I leave the ADF early I may be better off switching super now as the employer benefit only grows inline with the CPI, and to capture it's full potential, you really need to have the time up.

    Are there any other issues or questions I need to ask when I contact them? Thanks again for your help.
     
  7. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    This really makes no sense
     
  8. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    You need personal financial advice
     
  9. Perthguy

    Perthguy Well-Known Member

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    Could he mean medicare levy surcharge?
     
  10. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    I meant bringing medicare or levy into discussion about contributions to super makes no sense.
     
  11. craigc

    craigc Well-Known Member

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    Again check your fund T&C’s Mr Alex, it is likely there will be a calculation made by the fund actuary to ensure you obtain the minimum of either the 9.5% min super contribution or the db calculated amount whichever is greater.
    I don’t believe you could only receive CPI (from my reading of your comments above).
    Again this can be very complex so please check the fund carefully and seek financial advice from a planner familiar with db funds.
    Some of the main benefit of a db fund can be guaranteed returns in uncertain financial times (gfc, current virus situation) as the employer wears the return risk, however in good times of returns the employer can get the return rewards & the employee receives the db calculated returns.
    This can be very complex, so again please seek good financial advice.
    Good luck
     
  12. craigc

    craigc Well-Known Member

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    Sorry Paul, what part don’t you understand?

    As outlined above, it is a very complex older db fund which has many similar complexities to the points outlined above. Until Mr Alex reviews his super fund ‘T&C’s’ we can not be sure of the exact details.
     
  13. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    I meant bringing medicare or levy into discussion about contributions to super makes no sense.

    Actuaries dont determine notional contributions. The trustee can but its often determined after 30 June. The trustee should have a rough idea in mid May Each taxpayer at that time can and should check their caps which may be more than $25K) . If fund underperformance occurs prior to 30 June (highly probable) the trustee may allocate some income from reserves. These are grossed up for tax purposes and also impact notional contributions (subdiv 292-D ITAA97 regs)

    Planning sal sac is incerdibly complex for DB members but some basic choices can be made. Some modern DB funds also have a optional accumulation account element which may assist simplify matters. A FP other than one with access to the DB account probably would be throwing darts with a blindfold.
     
  14. mr_alex

    mr_alex Well-Known Member

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    From what iv read the DB is locked in or preserved when I leave the ADF, only growing at CPI, while I'm in it grows according to the calculation.
    1-7 yrs =18%
    7-20yrs= 23%
    20+ = 28%

    So I think if I do 10yrs then leave, my lump sum would be ((7x0.18) + (3x0.23) x FAS
    And my annual pension would be that amount divided by 12 if taken at age 55 or 11 if taken at 60, and the pension will also increase with CPI.

    As there is a accumulation side to it, I'll probably stay with this super and do Sal sac as well.
     
  15. craigc

    craigc Well-Known Member

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    Ahh Mr Alex, that is different. Sorry I thought you meant you were only receiving CPI. This is a benefit amount that is indexed after leaving, not whilst you are still earning whilst a member of the ADF.
     
  16. craigc

    craigc Well-Known Member

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