Salary savers

Thursday 1 July 2004

Sick of seeing the tax man cut a swathe through your monthly pay cheque? Frances Martin outlines five steps to a slimmer tax bill

By The Landlord

It’s easy for salary earners to get down in the dumps about tax. The days when you could claim that new business suit or dictaphone as a tax deductible expense disappeared back in the 1980s, and opportunities to minimise tax seem few and far between. But with a bit of careful planning there are legal means of hanging on to more of that hard-earned cash.

1 Salary sacrifice. In 2000 the government raised the tax rate on income above $60,000 to 39%. But it left the withholding tax payable on employer contributions to registered superannuation schemes at 33%. The six-cents-in-the-dollar gap was intended to encourage people to save for retirement.

Salary sacrifice works like this: say you have a taxable income of $70,000. If you choose to take all of your salary as take-home pay, you will pay 39 cents tax on every dollar you earn over $60,000 — that’s $3900 in income tax. To take advantage of the tax incentive, you arrange for your employer to reduce your salary by $10,000, and pay that same $10,000 directly into a super scheme. On the $10,000 of your salary sacrifice, your employer pays only 33 cents in the dollar withholding tax — that’s $3300. By taking the salary sacrifice you end up paying $600 a year less in tax.

It’s not hard to set up a salary sacrifice scheme, says PricewaterhouseCoopers financial planning partner Brent Procter. Most big fund managers have off-the-shelf products that you and your employer can use. But there are some potential pitfalls, he says. For instance, some schemes lock your money in until retirement, except in special circumstances. If you do withdraw money early you may, in some cases, be liable for an additional 5% withdrawal tax. Another potential problem is that because salary sacrifice reduces your base salary, it can reduce benefits that are calculated on your base salary.
For example, if you lower your base salary from $70,000 to $60,000 things like life insurance, income protection payments and ACC payments will all be calculated on the lower amount.

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