Revisiting salary sacrifice/TTR strategies

30 March 2021

Rob Lavery

Rod Lavery is Technical Manager at knowIT Group.

Combining a salary sacrifice arrangement with a Transition to Retirement (TTR) pension has long been a strategic staple of pre-retirement planning. The tax savings, combined with the ability to augment potentially reduced income, has obvious appeal.

However, over the past three and a half years, there have been significant legislative changes that have impacted the efficacy of salary sacrifice/TTR strategies. The introduction of personal deductible contributions for employees, the movement in tax brackets and offsets, and the movement in the preservation age have all shifted the goalposts.

Now is a prudent time to take a look at salary sacrifice/TTR strategies with a fresh set of eyes to determine how clients can make the most of the opportunity.

Salary sacrifice/TTR in a nutshell

In brief, the strategy is for clients who have reached preservation age (currently 58). The client:

  1. Salary sacrifices part of their employment income into superannuation; and
  2. Rolls part or all of their superannuation accumulation balance into a TTR pension, income from which can be used to supplement the sacrifice salary.

The lower rate of tax on pre-tax contributions to super as compared to the client’s marginal tax rate means they may be able to achieve a tax saving. If the client is aged 60 or older, the pension payments are tax-free and this accentuates the tax saving.

Prior to July 1, 2017, further tax savings could be made, as investments backing any pension were taxed at a lower rate than those supporting an account in accumulation phase. Since this date, assets backing a TTR pension have been subject to the same rate of tax as those in the accumulation phase. If the client has unrestricted non-preserved benefits, or has met a complete condition of release (such as turning 65), they are able to commence a non-TTR pension and can again benefit from this tax saving on pension investments.

The strategic lens

For the sake of the analysis that follows, only the taxable component of a pension is considered. While the proportional draw-down rules don’t allow clients to only withdraw the taxable component of a TTR pension, it is only the taxable component that represents a true tax saving.

Withdrawing the tax-free component from super is similar to a client living off their accrued savings in that they have already been taxed on that money before it was contributed to super. As such, the withdrawal of such funds is not a tax saving. For the purposes of this analysis, we are concerned with replacing income that is diverted to super.

Preservation age to age 60

The preservation age represents the earliest time from which most clients will be able to execute a potentially tax-effective salary sacrifice/TTR strategy. On July 1, 2020, the preservation age moved from 57 to 58. Up until July 2016, preservation age was 55.

Previously, it had been common to look at salary sacrifice/TTR strategies in two groups:

  1. preservation age up to the 60th birthday; and
  2. 60 and older.

The age span covered by the first group has gradually dropped from five years to two. During that time, the tax saving on investment returns backing a TTR pension was also removed. These two factors have heavily eroded both the number of clients who could benefit from such a strategy in that age range, and how much they stand to save in tax.

It should be noted, tax savings are still achievable – as the example below shows. That said, the parameters in this example have been tailored to emphasise the benefit. The result is an example clients very rarely see in real life.

Example 1

Jerry, aged 58, is a sole trader. He earns $205,000 per annum but does not currently contribute to superannuation. His net income is $137,983 after tax. 

Jerry has $500,000 (all taxable component) in superannuation. He rolls this over to start a TTR pension. The pension payment drawn from the TTR pension will increase his income, so he makes the maximum deductible contribution and draws the required pension payment ($19,485) to keep the same level of disposable (after-tax) income.

After executing the strategy, Jerry will have paid $1,765 less in tax (when both personal income tax and contributions tax is considered). This additional saving will be in his super fund.

Given the limited benefit a salary sacrifice/TTR strategy offers clients from preservation age up to age 60, the remainder of this analysis will focus on those aged 60 and older.

60 and older

For those aged 60 or over, the simple equation to determine the client’s tax saving achieved by implementing a salary sacrifice/TTR strategy is:

Tax on each dollar of income sacrificed


Tax on that same dollar if taken as income

Lower income earners

Changes announced in the 2020/21 Federal Budget, which have since been legislated, amended the personal income tax brackets, as well as the Low Income Tax Offset (LITO), and Low and Middle Income Tax Offset (LMITO).

One of the peculiarities of these changes is the concurrent existence of LMITO and the higher LITO during 2020/21. This one-year situation erodes the value of a salary sacrifice/TTR strategy on taxable income amounts earned between $37,500 and $45,000.

In practice:

Tax on each dollar of income sacrificed

15% (contributions tax) 

Tax on that same dollar if taken as income

19% (marginal tax rate) plus

2% (Medicare levy) plus

5% (LITO reduction rate) minus

7.5% (LMITO increase rate) equals


This means that each dollar in this income range saves the client only 3.5c in tax. Even if enough was sacrificed to cover the whole income bracket, it would provide a tax saving of less than $265. Such a small saving brings the value of the strategy into question for such clients.

It should be noted that, from July 1, 2021, LMITO is to be removed. This results in an 11 cents in the dollar tax saving in this tax bracket. This will give a better comparative outcome for low-income clients executing a salary sacrifice/TTR strategy.

Middle to higher income earners

Conversely, some middle to higher income earners get a strategic boost from LMITO in 2020/21.

Those earning $90,000 to $120,000 in taxable income are now in the 32.5 per cent tax bracket, as opposed to the 37 per cent tax bracket. While paying a lower rate of tax is a good thing, it reduces the efficacy of a salary sacrifice/TTR strategy.

That said, in 2020/21 only, LMITO gives the strategy a 5 per cent boost in this income range, as it is part of LMITO’s taper range.

In practice

Tax on each dollar of income sacrificed

15% (contributions tax)

Tax on that same dollar if taken as income 

32.5% (marginal tax rate) plus

2% (Medicare levy) plus

5% (LMITO taper rate) equals


The 24.5 per cent tax saving generated by the strategy has obvious appeal. Even in 2021/22, the 19.5 per cent saving is likely to still be worth pursuing.

Highest income earners

If an employee is on the highest marginal tax rate, the available concessional contributions cap to be filled with salary sacrifice contributions is small. Even at the lowest end of the tax bracket, Superannuation Guarantee contributions total $17,100.

That said, the percentage advantage in the highest tax bracket is significant (15 per cent as opposed to 47 per cent). Paying 32 per cent less tax on as little as $6,250 still provides a $2,000 saving – well worth pursuing. It should be kept in mind that, where a client’s income (including taxable contributions) exceeds $250,000 in a tax year, they will be subject to the additional 15 per cent, Division 293 tax on contributions over the threshold.

If the client’s income is not that of an employee (for example, it consists of trust distributions or company dividends), personal deductible contributions should be considered. For the strategy to work, such clients must have enough super to make large enough pension payments to compensate for the lost cashflow.

Personal deductible contributions vs salary sacrifice

In all the situations discussed, salary sacrifice is not the only contribution option. Since 2017, all clients eligible to contribute to super have had the ability to choose whether they reduce their taxable income by salary sacrifice contributions, by making personal deductible contributions or a combination of both. Salary sacrifice and personal deductible contributions both have their benefits and their drawbacks when considered in the context of a TTR strategy.

Salary sacrifice can be a set and forget solution. Once an agreement is established, it should be regularly reviewed, but it can roll on in perpetuity without further action required on the part of the client. Employees will also have tax withheld at a lower rate that reflects their income net of the salary sacrifice. On the negative side of the ledger, the client loses the use of the salary sacrificed money during the year, which could otherwise be used for a broader range of purposes, such as reducing interest repayments in a mortgage offset account.

Personal deductible contributions give greater control to the client. It is straightforward to make the exact deductible contribution, down to the dollar, just before June 30. The client just needs to remember to do so and not make errors in the notice. Money that sits in super for longer during the year is also exposed to investment returns for longer, which is positive in favourable markets.

That said, clients need to be careful to not commence a pension that includes the contribution before the deduction is claimed. Cashflow management is also harder in that the personal deductible contribution is typically lumpier than regular salary sacrifice contributions, and employees will have tax withheld on their salary without considering the deduction that will be claimed for the contribution.

The retirement/personal deductible contribution opportunity

As of July 1, 2020, personal contributions to super (including those that are deductible) can be made by a client up to their 67th birthday without meeting any work test requirements. This provides a tax minimisation opportunity for those who generate significant retirement income from non-super investments.

This age change is important, as the age at which super is uniformly non-preserved remains 65. Thus, a new two-year window has been created where preservation of super contributions, including those that are deductible, is no longer a potential drawback.

In effect, this allows strategies to be employed that are similar to salary sacrifice/TTR strategies, except that the pension is not subject to any withdrawal limitations.

Example 2

Bart and Ronda are both aged 66 and have retired. They live off distributions from their family trust, rental income from their jointly-owned holiday house, and Bart’s small account-based pension. Their assessable income is equal, and they are both in the 32.5 per cent marginal tax bracket.

Bart takes an annual payment of 10 per cent of the balance from his account-based pension to meet the income requirements of the family. That said, he could withdraw more than this amount (which would be tax-free) and use the additional pension payments to make personal deductible contributions for both himself and Ronda. This strategy could reduce their overall tax bill.

Even if the couple later discover they needed those funds in the short-term, Bart can increase his annual pension payment and withdraw them immediately.

Resetting salary sacrifice/TTR expectations

While the concept of a salary sacrifice/TTR strategy is not a new one, the legislative environment in which such a strategy is implemented has changed dramatically since 2017. It is crucial for clients to rethink whether they will benefit from such a strategy, and whether the amount they will benefit is worthwhile. Relying on pre-2017 conceptions of the strategy risks clients experiencing unfavourable outcomes.

Rob Lavery is Technical Manager at KnowIt Group.



To answer the following questions, go to the Learn tab at

  1. Which of the following statements regarding salary sacrifice/TTR strategies is false?
    1. The salary sacrificed amount is generally taxed at 15 per cent in the super fund (except where Division 293 tax is incurred).
    2. Earnings on investments that back TTR pensions are tax-free.
    3. The higher a client’s superannuation guarantee contribution, the lower the remaining concessional contribution cap amount available for salary sacrifice contributions.
    4. A client’s preservation age usually represents the earliest time from which a salary sacrifice/TTR strategy may be implemented.
  1. Which of the following statements is true?
    1. The existence of LMITO in 2020/21 makes salary sacrifice/TTR strategies more tax effective for all clients.
    2. The existence of LMITO in 2020/21 makes salary sacrifice/TTR strategies less tax effective for all clients.
    3. The existence of LMITO in 2020/21 makes salary sacrifice/TTR strategies less tax effective for some lower income earners, but more tax effective for some middle to high income earners.
    4. The existence of LMITO in 2020/21 has no impact on the tax effectiveness of salary sacrifice/TTR strategies.
  1. Anushka (aged 59) is keen to reduce her tax. She earns $45,000 per year and has a super balance of $200,000. Which of the following factors would be relevant to Anushka’s situation?
    1. At lower income levels, there is little difference between the contribution tax rate and personal tax rates, particularly while LMITO exists.
    2. The taxable component of Anushka’s pension would not necessarily be tax-free while she is under age 60.
    3. The earnings on any TTR pension are subject to the same tax rates as super savings in accumulation phase.
    4. All of the above
  1. Which of the following features are true of salary sacrifice arrangements and not personal deductible contributions?
    1. They reduce the client’s withholding tax on the salary payments that have been reduced by a sacrificed amount.
    2. They allow the client to use the funds for other purposes, such as reducing interest in a mortgage offset account, during the financial year.
    3. Clients need to be careful that they don’t commence a pension with the salary sacrificed amount before a salary sacrifice notice has been provided to their super fund.
    4. All of the above.
  1. Drew is aged 65. He lives off the earnings from the investments in his family trust, as well as payments from an account-based super pension. He requires 10 per cent of the balance of his pension as income this year. Which of the following statements about Drew’s situation are true?
    1. Drew is able to make personal contributions to super, including personal deductible contributions, without meeting the work test.
    2. Drew is able to withdraw as much of his pension as an annual payment as he wishes to (subject to the minimum pension payment rules).
    3. Drew’s pension payments will be tax-free.
    4. All of the above.