Salary Sacrifice Benefits and Warnings
In This Article
A salary sacrifice might seem, from the sound of it, to be a bad idea. Why would you want to “sacrifice” some of your salary? To make it work harder: short term pain for a medium term benefit. A salary sacrifice is an arrangement where an employee agrees to forego some of the wages that will be owed to them in the future, in exchange for something else of similar value.
(For an explanation of the recent political issues surrounding FBT and Salary Sacrifice, Click Here.)
Salary sacrifice, sometimes referred to as salary packaging, is when you buy something using your pre-tax income instead of your after tax income. This is usually set up with your employer, they will take the amount out of your wages/salary before it is given to you. This means you are left with a lower amount of taxable income.
For example, say you earned $50,000 a year and you wanted to buy a new computer for work, worth $2,000.
With salary sacrifice, the $2,000 would be taken out before you receive your income. So you would end up with a $48,000 taxable income figure, and the computer. Therefore you don't have to pay the income tax rate on that $2,000.
If it was done without using salary sacrifice, you'd receive your $50,000 usual income, pay tax on that $50,000, then buy your computer.
Basically, using the above example, if you use salary sacrifice, you will pay tax on $48,000 income. If you don't use salaray sacrifice, you will pay tax on the whole $50,000.
There are a number of ways that the employee can benefit from a salary sacrifice:
- Superannuation. One increasingly popular option is to invest it in superannuation. Contributions made through a salary sacrifice arrangement are Fringe Benefit Tax exempt. You pay the contributions in pre-taxed dollars, meaning they don’t get taxed as income before they’re paid to the fund, as would otherwise happen. The benefit of this system is simple – more money in your fund when you retire, for less money contributed.
- Fringe Benefits. These are “payments” to the employee but work differently to salary or wages. It’s a benefit provided with respect to employment, including rights, privileges and services. These can include a whole range of things, from getting a car to use for work or private purposes, the payment of an expense the employee incurs, such as school fees or childcare costs, or providing a cheap loan.
Cars are one of the main items that are usually salary sacrificed. Both the running costs and the finance payments can be sacrificed, up to a certain limit. You can do this with a new or used car, or even the car you already own.
Personal super contributions are a great option when using salary sacrifice. By paying super contributions using salary sacrifice, you can increase the total amount of funds eventually ending up in your super fund, as less tax is imposed on super contributions that are salary sacrificed. There is also a limit here, which is $25,000, which includes any super payments from employers as well as your own contributions.
Laptop computers, tablet computers and mobile phones can all be paid for by salary sacrifice, as long as they are going to be used for work purposes.
Other work related expenses, under certain conditions, could also be paid for using salary sacrifice. Things such as clothes, airline club memberships, tools of trade, travel expenses and many more work related items.
Be aware that fringe benefit taxes may apply to items paid for using salary sacrifice. Some exceptions do apply for employees of charity organisations, not-for-profit organisations, public hospitals and not-for-profit hospitals.
Speak to your employer. Also have in mind that some firms specialise in providing salary sacrifice set ups for employers and employees.
There are a number of rules to be followed. Firstly, you are not allowed to access the specified amount of salary being sacrificed for the whole period of the arrangement – the benefits cover this. The arrangement must also be made before the employee is entitled to the payment and is usually agreed before the work is performed. Also, if super payments are being made, it must be with one of the complying super funds.
- Additional taxes. If you’re sacrificing salary for superannuation purposes there may be a big surcharge.
- Employer’s contributions to super fund. The usual nine percent rate may be reduced when reducing taxable income through salary packaging.
- Tax levels. Salary sacrifice contributions will be taxed at 15 percent within your super fund, and maybe even at 16.5 per cent on withdrawal.