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Super: How to turn a tax liability into savings

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Because of the way tax is applied to superannuation, savvy employees can turn what would have been a tax liability into extra savings through salary sacrifice.

Many workers can, by agreement with their employer, have money paid into their super fund from their salary before income tax is taken out.

These contributions can reduce their tax bill as well as boosting their super: they will be taxed at 15% rather than their marginal rate.

For example, Michael has an annual salary of $90,000 (excluding the super guarantee). If he makes before-tax contributions to super of $10,000, he will boost his retirement savings and save $2400 in tax (based on 2014-15 rates and Medicare levy of 2%).

Without salary sacrifice Michael would have higher take-home pay ($66,953, tax $23,047). But with salary sacrifice there is less tax ($60,853, tax $19,147) and more super ($8500). Of course, he would need to ensure his total super contributions (including the SG) stay under the cap.

There are further tax savings for Michael because his earnings from investments via the super fund are taxed at only 15% rather than 39% (including 2% Medicare).

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Mark Chapman is director of tax communications at H&R Block, Australia's largest firm of tax accountants, and is a regular contributor to Money. Mark is the author of Life and Taxes: A Look at Life Through Tax.
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