If you have been offered a retention bonus, this document outlines some considerations to help you make an informed decision.
Before making a decision, it’s important to understand that everyone’s financial and personal circumstances are different. Therefore, the following material is merely educational. It is not personal financial advice. If you need personal financial advice, the last section (below) may be of assistance.
What this document covers
This document covers:
Tax implications if paid into your normal bank account
Implications of contributing the bonus to super
Effect on Centrelink payments and child support obligations
Appropriate sources for additional information and advice.
A retention bonus is considered part of your salary and wages and counted as ordinary time earnings (OTE) for super purposes, subject to the maximum super contribution base for the quarter in which the bonus is paid. This means that if your total employment income for the quarter exceeds the maximum super contributions base, Defence is not required to pay super on amounts over the limit.
Bonus paid into bank account
If the bonus is paid into your bank account, it will be taxed as ordinary salary and wages. An employer has several ways they can calculate the tax payable, but simply, it will be taxed at your marginal tax rate according to current individual income tax tables. If part of the bonus pushes you into the next tax bracket then that part of the bonus will be taxed at the higher rate.
If at the end of the financial year you complete your tax return and have paid too much tax, the excess tax payments will be refunded to you.
Bonus contributed pre-tax to super
If you decide to contribute the bonus to super it will be paid as an employer (concessional) super contribution, and taxed at 15% instead of your marginal tax rates. This could save you a significant amount in tax. For example, tax on a $50,000 bonus:
Paid to you and your marginal tax rate is 32.5% = $16,250
Paid to you and your marginal tax rate is 37% = $18,500
Contributed to your super fund and taxed at 15% = $7,500
There is a concessional contribution limit of $27,500 per financial year, and this includes employer and salary sacrificed contributions. However if your super balance is less than $500,000, you may be entitled to contribute more than this amount by using the unused concessional contributions cap from previous years. MSBS members can still take advantage of the unused concessional contributions cap if their combined member and ancillary balances are below $500,000.
Monies contributed to super can save you tax and increase the amount you have in super benefitting from compounding investment returns, however it is preserved (locked away) until you meet a condition of release, which for most people is turning 60 and leaving an employer.
An exception to the preservation rule is for members looking to buy their first home. Under the First home super saver scheme (FHSSS) you can withdraw up to $15,000 of voluntary contributions per financial year, up to a maximum of $50,000, plus investment returns, to be used for the purchase of your first home.
To find out more about how your superannuation works and how a retention bonus may affect it, contact your superannuation fund. For members of DFRDB, MSBS or ADF Super, the Commonwealth Superannuation Corporation will be able to assist.
Centrelink and child support
Services Australia, which includes Centrelink and Child Support, work off adjusted taxable income when calculating income support payments such as Family Tax Benefit (FBT) or child support payments. A bonus paid to you is part of salary and wages, and money salary sacrificed into super will be a reportable employer super contribution.
To find out how a retention bonus will affect your FTB or child support obligations, contact:
Centrelink families line on 136 150, or
Child support enquiry line on 131 272 or 1800 241 272
Explain to the relevant service that your bonus is a one-off payment that will only be received in the current financial year, and ask how your payments, or payment obligations will be affected.
Before deciding whether to accept or reject an offer of a retention bonus, consider how much you will gain, as well as any benefits you may lose.
Getting personal financial/professional advice
We stress again that this document must not be treated as personal financial advice. It is merely educational. If you need help making this decision we suggest getting advice from a suitably qualified financial adviser or a qualified accountant who will take account of your personal circumstances before making a recommendation.
Our financial advice referral program is a good place to start if you are looking for a fee-for-service financial adviser. Be aware that we do not recommend or endorse the advisers on the list and any relationship between you and the adviser is a strictly private relationship.