Wednesday, 25 January 2017

Bonus and taxes

My first salary 'bonus' is due to be paid early next month, and the HR department sent out a reminder to make any nominations to 'salary sacrifice' the bonus into superannuation be COB today, as any 'salary sacrifice' arrangements must be done prospectively, not retrospectively (after the income has been 'earned'). At face value it obviously makes a lot of sense to receive the bonus payment into superannuation (paying 15% contribution tax) rather than receiving it as a salary payment and paying income tax on it at a marginal rate of, say, 37%. On a 5% bonus for a $100K salary, the tax saving achieved via 'salary sacrifice' could be $1100. Looking at it another way, that means the 'after tax' bonus amount would be nearly 35% greater when paid into superannuation compared to taking it as a cash payment.

However, the individual decision regarding whether to 'salary sacrifice' the bonus isn't so simple. For example, DW is on a lower annual salary package, and only works 3 days a week, so her marginal tax rate would be 32.5%, and not 37%, which makes the tax incentive to lock away this money until retirement a lot less enticing. She also has a large settlement payment on an investment home unit due in the middle of this year, so any additional amount she puts into superannuation via salary sacrifice would add to her mortgage balance.

Even in my case I can't simply nominate to 'sacrifice' the entire bonus amount into superannuation, as I already have a sizable 'salary sacrifice' arrangement in place, and the 'cap' on concessionally taxed superannuation contributions might come into play. For my age group, the 'cap' this financial year is $35K (it will reduce to only $25K from 20017-18 onwards unless there are further changes announced in the May budget), and I already have around $9.5K of SGL contributions and $19.2K of existing 'salary sacrifice' arrangements. This would mean that around $6.3K more could be 'sacrificed' into superannuation this financial year without exceeding the 'cap'. However, I have to allow for the possibility of a  small increase in SGL contributions during the remainder of this financial year if I happen to get a pay rise (annual salary reviews are also being announced next month - just after bonuses get paid out), and there was a monthly employer contribution deposited on 1/7/2016, so I have to allow for the possibility that the contribution for June 2017 might get deposited at the end of June, meaning 13 monthly contributions falling into this FY.

Finally, my employer is also reimbursing small amounts for the monthly admin fee and insurance premium that gets initially debited from my superannuation account (~$85 per month), but the reimbursement payments get processed several months after the original debit transactions. There was a delay in the initial reimbursement payments (eg. a debit processed last FY (on 3/3) was eventually reimbursed via an additional employer superannuation contribution this FY (on 17/10), and there are currently two reimbursement payments being deposited each month in order to 'catch up'. So there *might* be as many as 18 lots of ~$85 deposited this FY, Which means allowing for another $3.8K or so that *might* be deposited this FY and count towards the 'cap'. So, the maximum amount of bonus I can 'salary sacrifice' and be reasonably certain that I won't exceed the 'cap' on concessionally taxed contributions is only $2.5K. In the end I decided to request that $2K of any bonus amount be paid as 'salary sacrifice'.

Next FY I'll have to reduce the amount of monthly 'salary sacrifice' due to the decrease in 'cap'. I probably won't bother to allow for any bonus to be processed via salary sacrifice next year.

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