The Salary Sacrifice Squeeze
Priya is 47 and earns $185,000 as a public hospital anaesthetist. Her employer contributes 12.5% of her $180,000 base salary to a defined contribution fund, and she also salary sacrifices $20,000 per year. Her fund balance is $640,000. In March her accountant proposes lifting the sacrifice to $35,000 to use 'all the concessional cap'. Priya also mentions she received a $60,000 termination payment last year that she rolled into the fund and claimed as a personal deductible contribution. Her employer's 12.5% contribution is calculated on base salary only. Her marginal tax rate is 47% including Medicare. She asks whether the extra $15,000 is worth it and whether her prior-year claim was correct.
1. Assess whether Priya's proposed $35,000 sacrifice fits within the concessional contributions cap, and quantify the tax outcome of the extra $15,000.
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The concessional cap for the year is $30,000 (the higher $35,000 cap applies only from age 60 under the higher-cap rules, and Priya is 47). Her employer contributes 12.5% × $180,000 = $22,500. Adding $35,000 of sacrifice gives total concessional contributions of $57,500 - $27,500 over the cap. Even her current $20,000 sacrifice produces $42,500, already $12,500 over.
The excess is included in her assessable income and taxed at her marginal rate (47%), with a 15% offset for tax already paid in the fund - an effective additional tax of about 32% on the excess. The extra $15,000 of sacrifice is therefore not simply taxed at 15%; it pushes more contributions into the excess zone. A better structure is to cap total concessional contributions at $30,000, i.e. sacrifice no more than $7,500, and consider a non-concessional contribution (subject to the $120,000 cap and bring-forward availability) for the remainder. The tax saving on a within-cap contribution is roughly 47% − 15% = 32%, or about $2,400 on $7,500.
2. Was Priya's treatment of the $60,000 termination payment as a personal deductible contribution correct? What should she verify?
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Not necessarily. A personal deductible contribution requires that the amount be a contribution to a complying super fund and that she notify the fund of her intention to claim a deduction before lodging her return (and before the fund reports the contribution). A termination payment is generally a payment from an employer, not a personal contribution; if it was paid to her and she then contributed it, it may qualify, but if it was paid directly to the fund as an employer contribution it would already count as a concessional contribution and could not be claimed again.
She must also check that the $60,000 did not exceed her available cap, since her employer's $22,500 plus $60,000 would be far over $30,000. She should obtain the fund's contribution statement, confirm the notice of intent was acknowledged, and check her MyGov ATO contribution records. If the deduction was invalid or the cap exceeded, she may need to amend her return and account for excess concessional contributions tax.
3. What advice should be given about the interaction of the 12.5% employer contribution with the cap over the next several years?
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Her employer contribution rises with base salary, so as salary grows the headroom under the $30,000 cap shrinks. At $180,000 base the employer alone uses $22,500, leaving only $7,500. Priya should model the employer contribution each year before setting a sacrifice amount, and use a 'catch-up' concessional contribution strategy only if she has unused cap from prior years and a balance below $500,000 (the carry-forward rule). She should also note that from age 60 the higher $35,000 cap may apply, so deferring some contributions could be efficient, though the trade-off is lost compounding. A written projection comparing within-cap sacrifice, non-concessional contributions, and the age-60 cap is the appropriate next step.