Jacob, who is aged 59, is reaching retirement. He has about $500,000 in his superannuation fund...

Jacob, who is aged 59, is reaching retirement. He has about $500,000 in his superannuation fund and would like to increase the amount in superannuation so that he could draw down a pension when he retires. Jacob’s annual salary package is $240,000 and he also earns income from a business he owns as a sole trader. The assessable income of the business is $80,000 per annum and it makes a profit of $45,000 per annum, which is included in Jacob’s taxable income. For the 2019/20 financial year, Jacob has decided to salary sacrifice the maximum amount for his age.

Is it worthwhile for Jacob to salary sacrifice $25,000? What are the advantages of salary sacrificing compared with making a contribution to superannuation from Jacob’s after-tax salary?

Expert Solution

Yes It Is it worthwhile for Jacob to salary sacrifice $25,000 because-

Salary sacrificing is a pre-tax contribution from your income to your super account, so you'll have more money to enjoy in retirement. The amount you choose comes out before you are paid, reducing your taxable income and giving an immediate tax benefit. This approach makes it as painless as possible.

Contribution based on your income after the salary sacrifice has been deducted. This would reduce the amount that they pay to your super.After-tax (non-concessional) contributions are deducted from your salary after your income tax has been deducted.

The advantages of salary sacrifice are that you are buying the benefit in pre tax dollars.

Salary sacrifice reduces your taxable income, so you pay less income tax. 2 This can be much lower than the tax on investments outside superannuation. The compulsory superannuation guarantee contribution provided by your employer might not be enough to fund the retirement you want.

ekkarill92 answered 1 year ago

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