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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.
What’s in it for me?
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.
How do you go about it?
Speak to your employer. Also have in mind that some firms specialise in providing salary sacrifice set ups for employers and employees. One of these is Access Pay (www.accesspay.com.au).
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.
Things to look out for
- 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.
This salary sacrifice calculator from the Australian Consumer's Association is a very handy tool to help you figure out what you may be entitled to: http://www.aca.com.au/cp/money/salarysacrifice.cfm