Salary sacrifice or personal deductible contributions to build super – what’s best? [CPD Quiz]

31 March 2020

Mark Gleeson

Mark Gleeson CFP® is Technical Services Manager at Insignia Financial. He has 20 years’ experience within the...

Following the changes to super guarantee contributions from 1 January 2020, this article explores the pros and cons of super salary sacrificing and personal deductible contributions.

The removal of the 10 per cent test from 1 July 2017 made personal deductible contributions more popular and widely available as a strategy. Previously, there were some drawbacks to salary sacrifice on super. As a result, some clients switched to personal deductible contributions as a way of building their super balance.

One of the key drawbacks of salary sacrifice was that employers could reduce super guarantee (SG) payments. However, since 1 January 2020, salary sacrifice amounts are now included in an employee’s ordinary time earnings and so, employers must pay super guarantee on these amounts.

Accordingly, it is worth revisiting the question – should your client use salary sacrifice or personal deductible contributions to build their super?

What changed on 1 January 2020?

Legislation was passed in late 2019 to require employers to satisfy the following super guarantee rules for quarters commencing from 1 January 2020:

  • Employer contributions made under a salary sacrifice arrangement are prevented from satisfying an employer’s super guarantee obligations (see Example 1).
  • Salary sacrifice contributions are added to ordinary time earnings. Therefore, super guarantee obligations must be paid on pre-salary sacrifice income (see Example 2).

The following examples illustrate how an employer could use the salary sacrifice amount to reduce their SG payments. SG is a quarterly requirement, but for simplicity, we have used fortnightly figures in the first example and annual figures in the second example.

Example 1

Before 1 January 2020, Sam (age 52) had fortnightly earnings of $2,750. He established a salary sacrifice arrangement to forego $250 per fortnight (pf) of his salary for additional employer super contributions. Sam’s ordinary time earnings (OTE) reduced to $2,500 pf and his employer must have contributed at least $237.50 pf (9.5 per cent of $2,500).

Sam’s employer paid a $250 salary sacrifice contribution into his super fund and used this contribution to satisfy the $237.50 super guarantee obligation. Consequently, his employer’s SG obligation was satisfied. From 1 January 2020, Sam’s employer must pay the required amount of SG on pre-salary sacrifice income in addition to paying the salary sacrifice amount.

Example 2

Let’s now consider Jade (age 47) in the current financial year (2019/20). Her salary is $60,000 per year and she salary sacrifices $10,000 per year into super. Table 1 outlines her employer’s actions before and after 1 January 2020.

Table 1

Period Outcome Salary sacrifice contribution Super guarantee Total employer contribution
Prior to 1 January 2020 Jade’s employer paid 9.5% on $50,000, her previous OTE $10,000 $4,750

(9.5% x $50,000)

From 1 January 2020 Jade’s employer pays 9.5% on $60,000, her new OTE $10,000 $5,700

(9.5% x $60,000)



After 1 January 2020, Jade’s total gross employer contribution increases by nearly $1,000 ($15,700 less $14,750) on an annual basis. Due to these practices by certain employers (as illustrated by Sam and Jade), many employees switched off salary sacrifice arrangements from 1 July 2017 and made personal deductible contributions instead.

Tech tip: There is some confusion in the media about the start date of the new employer SG rules. The original Bill included a start date of 1 July 2020 for this measure. However, the Bill was amended during Parliament and the start date was brought forward to 1 January 2020. Consequently, employers did not receive much lead time to ensure their systems and processes comply. If you have clients who are employers, you should ensure they are aware of the changes. The cut-off date to make super guarantee contributions for the January quarter is 28 April 2020.

The rate of SG increases from 9.5 per cent to 10 per cent in 2021/22. Thereafter, the rate increases by half a percentage point each financial year until reaching 12 per cent in 2025/26. Clients may need to review salary sacrifice arrangements when the super guarantee rate increases to ensure there are no breaches of the concessional contributions cap.

Salary sacrifice: The case for

Salary sacrifice to super has been a cornerstone strategy to build a client’s retirement benefits in a tax-effective manner. The benefits of salary sacrificing, in contrast to personal deductible contributions, include:

  • Discipline – The automated nature of salary sacrificing into super may appeal to clients who would struggle to save the equivalent amount required to make a personal deductible contribution at the end of the financial year. Salary sacrifice may provide the discipline to build super over the long-term.
  • Dollar cost averaging – Salary sacrifice allows clients to buy into the market at regular intervals and therefore, reduce the risk of market timing. In contrast, large, one-off personal deductible contributions made in May or June are more subject to market timing risk.
  • No notice of intent – The client does not need to worry about submitting a notice of intent to their super fund when salary sacrificing, unlike personal deductible contributions.

Salary sacrifice: The case against

Before you recommend salary sacrifice, consider the following restrictions or possibilities.

  1. When the employer does not provide salary sacrifice or when the arrangement may be ineffective

Some planners have recommended that a client salary sacrifice, only to discover that the employer does not provide such an arrangement. This experience creates a lack of fulfilment for the client and means the advice needs to be re-evaluated. A personal deductible contribution strategy bypasses the employer and allows the planner to manage the outcome with the client directly.

Where the employer can offer salary sacrifice, the arrangement must be in place before the employee has actually earned the entitlement. This is known as an ‘effective salary sacrifice’ arrangement.

An agreement in respect of entitlements that have already been earned is an ineffective salary sacrifice arrangement. Under an ineffective salary sacrifice arrangement, the sacrificed wage or salary forms part of the employee’s assessable income and is taxed accordingly. Any super contributions made under an ineffective salary sacrifice arrangement constitute non-concessional contributions of the employee. Therefore, salary sacrificing creates a potential risk of ineffective arrangements and ineffective tax outcomes.

  1. The prospect of excess concessional contributions

Managing the concessional contributions cap with salary sacrifice can be difficult for higher income clients. For example, unexpected salary increases or a bonus can boost the amount of employer contributions and lead to excess concessional contributions.

In contrast, a personal deductible contribution made towards the end of the financial year is much less likely to create an excess concessional contribution problem, as existing SG amounts can be factored in when calculating the required amount of deductible contribution.

Another common problem with salary sacrifice arrangements can occur towards the end of the financial year if June payments are not made until July, due to delays by either the employer or the super fund.

The Australian Taxation Office (ATO) can use its discretion in special circumstances to reallocate the contribution to the more appropriate financial year. However, the ATO has suggested in Practice Statement Law Administration PS LA 2008/1 that if the salary sacrifice arrangement has specific dates for the employer contributions to be made, the ATO is more likely to use its discretion to reallocate the contribution.

In practice, not many agreements have specific dates for all contributions to be made during the financial year. Therefore, ATO discretion to reallocate contributions cannot generally be relied upon when salary sacrificing.

  1. Salary sacrifice can affect income replacement insurance

Where an employee has an income replacement policy and is considering salary sacrifice into super, the insurance provider should be contacted to determine whether any potential payment of benefits under the income replacement policy could be jeopardised by implementing the salary sacrifice arrangement.

A personal deductible contribution strategy is unlikely to impact income replacement insurance, as the client is not reducing salary, rather they are claiming a tax deduction on contributions to super.

  1. Salary sacrifice contributions may go to a different fund

An employer does not have to pay salary sacrifice contributions into the chosen fund of the employee. Choice of super fund allows eligible employees to choose the super fund that receives their SG contributions, but not salary sacrifice contributions. Therefore, salary sacrifice contributions may be made to a fund chosen by the employer.

An employee may seek agreement from the employer to include a section specifying the relevant super fund or a section that provides the employee with the ability to choose a super fund.

In contrast, personal deductible contributions can be made to a super fund chosen by the individual member.

  1. Uncertain frequency of salary sacrificed contributions

Unlike SG contributions, super legislation does not specify the contribution frequency required for salary sacrifice contributions. Some industrial relation instruments, like modern awards, may outline the minimum frequency of salary sacrifice amounts. Ideally, a salary sacrifice agreement should include a section outlining the minimum frequency that salary sacrifice contributions will be made by the employer.

In contrast, an individual member can choose when to make a personal deductible contribution. For example, the client may wish to make contributions evenly across the financial year or make a one-off contribution towards the end of the financial year.

Personal deductible contributions: The case for

Since 1 July 2017, all clients eligible to contribute to super can make personal deductible contributions, including employees, the self-employed and clients under age 65 who are retired. Since 1 July 2017, clients cannot make personal deductible contributions to untaxed and certain defined benefit super funds.

To make personal contributions to super, a client must be eligible to contribute. This generally means the client must be under age 65 or satisfy the work test (or work test exemption) between age 65 to 74. A contribution can be accepted within 28 days following the end of the month when they become age 75.

The personal contribution can be made regularly throughout the financial year, for example, if market timing is a concern, or alternatively they can be made towards the end of the financial year when the client has a clearer position of their taxable income.

A possible approach to take for a personal deductible contribution is to accumulate a certain amount in a mortgage offset account, or similar type of cash account, over the course of the financial year and then make a one-off contribution towards the end of the financial year. Otherwise, sufficient funds may not be available to make the personal deductible contribution.

The end of the financial year is a great time to assist clients in maximising their super balance through tax-effective strategies, for example, spouse contributions, co-contributions and contribution splitting. You can use personal deductible contribution as a potential strategy for all clients who are eligible to contribute to super.

Personal deductible contributions: The case against

One of the strict requirements to qualify for personal deductible contributions is that the notice of intent must be given to the super fund within legislated time frames. The notice must be given before the earlier of:

  • when the client lodges their tax return; or
  • 30 June of the next financial year.

In some cases, clients need to submit a notice of intent before these times. In particular, a client must submit a notice of intent and receive acknowledgement before:

  • the client commences an income stream with either all or part of the contribution.
  • the client withdraws or rolls over benefits (which include the contribution).
  • the client gives the trustee a splitting contributions application.

Tech tip: Failure to adhere to the notice time frames may result in no deduction or a reduced deduction. As more clients are eligible to make deductible contributions, there is an increased need for advice to ensure the notice is submitted in a timely manner and the desired deduction is obtained.

If the client is unlikely to save the required amount for a tax deduction by the end of the financial year, then a personal deductible contribution strategy is less suitable compared to entering a salary sacrifice arrangement.

Case study 1

Abdul, age 50, is keen to build wealth for retirement and you want to establish whether he should salary sacrifice or make personal deductible contributions. He earns $55,000 per year, has an inherited investment property valued at $500,000, but negligible other savings. You have detected that Abdul is not a great saver and is unlikely to have excess concessional contribution issues.

Accordingly, you recommend that Abdul implement a salary sacrifice arrangement of $5,000 per year, which meets his present cashflow needs. Abdul is happy with this disciplined approach to building super.

Case study 2

Steph, age 59, is an engineer and earns $125,000 per year. Her non-super savings are substantial, and she now wants to consider options to build her super because to date, she has relied only on SG contributions. Her total super balance at 30 June 2019 is $525,000.

You have identified that her super guarantee contributions are $11,875 (9.5 per cent x $125,000) and accordingly, she could consider salary sacrificing $13,125 per year or make the same amount as a personal deductible contribution.

Steph has mentioned that she sometimes receives significant bonuses. Estimating the amount of SG on her bonus is difficult and you are concerned she may exceed the concessional contributions cap. As you struggle to find the percentage figure or dollar amount for Steph to salary sacrifice, you consider personal deductible contributions.

As Steph has demonstrated a capacity to save, you recommend that she build savings of at least $11,975 in a cash reserve. You wait until later in the financial year when she has a more distinct picture of her total taxable income and her bonus is paid.

You estimate total employer contributions for the full financial year to be $15,000. Accordingly, you recommend a personal deductible contribution of $10,000 in June.

You advise Steph about submitting the notice of intent to the trustee within the strict time frames. Unfortunately, the catch-up concessional contribution measure is not available to Steph, as her total super balance at 30 June 2019 is above $500,000.


Salary sacrifice was traditionally used by planners to build retirement benefits for clients. Following the removal of the 10 per cent test in 2017, many clients switched to personal deductible contributions.

The good news for salary sacrifice arrangements from 1 January 2020 is that employers can no longer reduce SG entitlements. However, salary sacrifice may still have other limitations, such as, employers who do not provide salary sacrifice, a greater chance of excess concessional contributions for higher income earners and irregular frequency of contributions.

Clients who don’t wish to commit to salary sacrifice may be more willing to make personal deductible contributions at the end of the financial year, based on their financial position at that point. A savings strategy may be required to ensure sufficient funds are available to make the contribution. Planners should ensure the notice of intent is submitted within the required time frames when making personal deductible contributions.

To answer the question about whether salary sacrifice or personal deductible contributions are best – it’s a draw. As is generally the case, the most appropriate strategy depends on your client’s personal situation.

Mark Gleeson CFP®, Senior Technical Manager, IOOF TechConnect.



To answer the following questions, click here.

1. What is one of the key changes from 1 January 2020?

a. The 10 per cent test no longer applies for personal deductible contributions.

b. Employers must pay super guarantee on post-salary sacrifice income.

c. Employers must pay super guarantee on pre-salary sacrifice income.

d. Employers can choose to pay super guarantee on pre or post-salary sacrifice income.


2. What should you consider when recommending a salary sacrifice arrangement?

a. The notice of intent should be submitted within the relevant time frame.

b. The agreement should relate to income previously earned.

c. The sum of super guarantee and salary sacrifice should be within the non-concessional contributions cap.

d. The sum of super guarantee and salary sacrifice should be within the concessional contributions cap.


3. Which of the following statements is true about the rate of super guarantee under existing legislation?

a. The rate remains at 9.5 per cent indefinitely.

b. The rate increases to 10 per cent by 1 July 2021.

c. The rate increases to 11 per cent by 1 July 2025.

d. The rate increases to 12 per cent by 1 July 2021


4. Consider the following three clients:

  • Simon, 47, self-employed;
  • Cathy, 52, working full-time as an employee; and
  • Anne, 67, an investor who has satisfied the work test with a part-time role.

Which of these clients could consider personal deductible contributions as a strategy?

a. Simon only.

b. Anne only.

c. Simon and Anne.

d. Simon, Cathy and Anne.


5.  Which of the following is true about the notice of intent when making personal deductible contributions?

a. The notice of intent must be given to the super fund before lodging the tax return, or 30 June of the next financial year, whichever is first.

b. The notice of intent must be given to the super fund on or before making the contribution.

c. The notice of intent must be given to the ATO on or before making the contribution.

d. The notice of intent can be given to a super fund once an income stream has commenced using the contribution.