Salary Sacrifice, that doesn’t sound so good, I would much prefer a salary boost. Of course most of us understand what salary sacrifice means in the context of tax and super and that it actually does generally mean a salary boost if used wisely.
First things first, let’s define what salary sacrifice means for you and me. Salary sacrifice is an arrangement between an employer and an employee to forego future wages in exchange of certain benefits of similar value. These benefits could include one or any of these examples: extra super contributions, car fringe benefits, allowance for school fees, child care, loan repayments.
However as with all things financial a general good idea can be terrible if you do not know what you are doing. It is therefore always a good idea to consult a financial advisor every time you are considering asking or accepting a salary sacrifice.
What are the requirements?
There are a variety of requirements that must be met before you can make a legitimate salary sacrifice arrangement. For instance you can only make salary sacrifice for wages you are yet to receive, it cannot be retroactive. The salary sacrifice must also fall under some certain categories and formats which include the list of benefits we mentioned above.
You might also have to pay an administrative fee to your employer for the managing of your salary sacrifice arrangement. Remember, the pen pusher behind the desk has to eat and feed his family also.
What are the benfits of salary sacrifice for super?
Super contributions do not fall under fringe benefits for tax purposes when paid into a complying super fund. This provides a list of benefits to your employer. He won’t have to pay fringe benefits tax on the super contributions or include the super contributions as a reportable fringe benefit on your payment. These payments are also deductible for your employer and you can more often than not claim a tax deduction also.
Contributing towards your super fund with a salary sacrifice also reduces the income assessable for tax and the amount you invest in your fund is taxed at a maximum rate of 15%.
However there is a limit in the amount of cash you can contribute towards your super fund before you start having to pay extra tax and it is not longer a cost effective investment. Make sure you check our website or the Taxation Office for more details about paying super fund contributions and your tax.
Self managed super funds, dangers and opportunities.
We all like to have control over what we do which is why Self Managed Super Funds are quite attractive for many of us. We prefer to decide what we invest or how we invest our Super Fund than having some other person or organization do so for a price or commission. We might even feel we can do better than the average super fund and that nobody will put the time and interest in our fund that we will.
All these arguments and points are valid and worth thinking and acting upon. However if you are thinking about managing your own super fund there are two points you need to think about.
1) Managing your own fund is a privilege and a responsibility. If you manage your own super fund it will be your responsibility (and yours alone) to fulfill the legal requirements associated with your fund. Not complying with your legal super fund requirements can mean red tape, time and ultimately fines. You must therefore have the legal knowledge or advice to meet your legal super fund requirements.
2) Managing your own super fund means exactly that, deciding what to invest your money in. This might sound good and it can be, but it also means that you are responsible for the investments you make and without the financial knowhow you could make bad choices and lose your hard earned Super contributions.
If you still think managing your own fund is a good idea your next step is the find the knowledge and / or advice you need. You can find this knowledge from many sources, it is always a good idea to get your advice from established and experienced operators that can help you make the right moves to invest your super fund and make it grow. It is therefore a good if not vital move to contact a legal and a financial expert before you make any drastic moves with your super fund.
Without this advice you run the risk of either not meeting your requirements for a super fund, lose money (unfortunately that is always a risk, however this risk is lower if you invest wisely for the long term) or fall out of the definition of a self managed super fund.
It is therefore a good reminder to go through the main requirements of a legal and licensed super fund. The exact rules that govern your self managed super fund will depend on the kind of self managed super fund you have (more posts on that issue soon)but these general guidelines apply to all self managed super funds:
1) You must be honest in everything you do related to your fund. The taxation office will fall on you like a ton of bricks if you don’t.
2) You must be diligent and know what you are doing with matters related to your fund.
3) You need to act in the best interest of the super fund members. That is easy when you are the only member but requires more attention when your fund has other members.
4) Keep your personal assets and the super fund separate.
5) Have control over your super fund at all times
6) Have a clear fund investment strategy
7) You can’t embark in contracts or agreements that involves depriving members of rightful control of their assets.
8) Provide your members with required information.
9) You can’t access or allow others to access funds early.
Understanding and putting into practice these guidelines will allow you to overcome many of the dangers of managing your own super fund.