"It's smart, it's clever and it's legal. Why? Because it allows you to use pre-tax income instead of after-tax income to contribute to your Superannuation."

Salary sacrifice is a key financial planning strategy that not only achieves wealth accumulation, but also fast and incredible tax-effective benefits. As well as its tax advantages, it also enables you to store and accumulate substantial funds that you might otherwise spend, leaving you with nothing in later years.

If you earn $70,000 gross, a typical salary sacrifice arrangement might be to agree to accept $50,000 in gross salary and to have your employer pay $20,000 in extra superannuation contributions.

In these circumstances, salary sacrificing would provide you with $4,670 in extra total benefits after tax, which represents the difference between the additional superannuation contribution and the loss of disposable income.

The following table shows the comparative benefits of no salary sacrifice versus salary sacrifice:

*Net of Contributions Tax = 9% of $70,000 = $6,300 less 15% = $5,355
**Net of Contributions Tax = 9% of $50,000 = $4,500 less 15% = $3,825

In the first year of having salary sacrifice in place, one has $20,825 invested in Superannuation ($17,000 + $3,825) compared with the $5,355 enjoyed by the non-participant. So if you participated for only one year and never put another cent away, your year's savings would (ignoring the exit taxes) end up as more than $39,000 after 10 years at 6.5% earnings and more than $73,000 after 20 years.

It must be emphasised however, that wealth accumulation is not a one-off flash-in-the-pan. Like investment itself, time is its greatest friend because it allows what Einstein described as "the greatest mathematical discovery of all time" - compound interest - which produces seemingly magical results.

Earnings of $70,000 annually are common place these days for qualified persons in their 30s and 40s. So, if you are aged 45 today and decide to adopt a salary sacrifice plan similar to the one above, you would, based on a conservative 6.5% annual earnings, have an extra $223,000 if you retired in 10 years aged 55.

If you elect to soldier on to 65, your nest egg will have grown over the 20 years to $861,000.

All of which compares with only about $221,000 if you simply do nothing and go ahead and spend your entire salary on lifestyle expenses.

Employers also benefit from salary sacrifice. They;

• can still receive a tax deduction for contributions made to your superannuation.
• save salary on-costs (that is payroll tax and workers compensation charges), and continue to receive a tax deduction for salary expenses.
• do not pay fringe benefits tax, because superannuation contributions made for employees are exempt.

To satisfy superannuation guarantee obligations (assuming full preservation applies to the salary sacrifice), your employer must make sure your reduced salary is also applied to your long service leave, annual leave and leave loading. Where this is the case, the contribution is deemed to be paid by the employer. For your employer to claim a tax deduction for superannuation in the current year, the amount must actually be paid in that year.

Superannuation is still one of the most effective ways of saving for retirement.

In comparison with negative gearing as a way of accruing wealth, salary sacrifice remains more easily within the reach of all working Australians.

To run your details through our program and find out how much you can save, contact Don Blackwell or Grant Hodgins on 08 8333 1944.