What is Salary Sacrifice and how does salary packaging saves tax in Australia?

Salary sacrifice is a way of paying some type of expense from your income before the income is taxed. Sounds confusing??? Salary packaging is essentially an arrangement between and employer and an employee where both parties agree to forgo a part of income for a benefit. Benefit can range from salary sacrifice car expenses or salary sacrifice in super or other expenses etc etc. In simple words, how the arrangement benefits an employee is that if an employee has an expense [lets take car for example] and that expense is normally paid from after tax income [disposable income] but in salary sacrifice arrangement employee will pay that expense from before tax income leaving the employee with lesser in hand income on books and thus taking them into lower tax bracket.

Below is an example to make the benefits clearer. We will take example of a Sales Executive who needs car for work purposes and instead of paying for the car expenses from after tax money, the sales executive gets into a salary packaging arrangement with an employer.

You can not automatically opt to start a salary sacrifice arrangement.

Your employer then has to pay fringe benefits tax (FBT) on the benefits provided to you. Some of these benefits will be listed on your end of year payment summary and are used to assess your Medicare levy surcharge, tax offsets, child support payments and other government benefits.Source: moneysmart

So you need to discuss with your employer if they offer any salary sacrifice arrangement and that will totally depend on if they are registered for FBT and if they are willing to pay FBT on your salary sacrifice arrangement. Certain organisations are exempt from FBT and in my work experience I have noticed that these organisations offer highest salary sacrifice arrangements. I have seen a vast difference between salary sacrifice benefits provided by a FBT non exempt entity against FBT exempt entity such as Hospitals. Almost every PAYG summary from a nurse will have anywhere from $25,000 to $30,000 salary sacrifice. Let’s take an example of an employee with a non exempt entity providing no salary sacrifice against and employee like a nurse from FBT exempt entity. We will take Salary sacrifice $1500 for Health insurance, $10500 Loans (usually for a car), $5000 School fees, $10000 Childcare fees and $3000 Other personal expenses.

I know it looks unfair but that is the way it works. Thus I would suggest to tale with your employer if they offer any salary sacrifice arrangements. Even if your employer offers a large amount of salary sacrifice arrangements you need to be careful that you do not do too much salary sacrifice as this does leave you with less income hand although the overall savings are higher. If you want to go for salary sacrifice and your employer is also happy to do so – please have a word with me [CPA accountant] so that we can work out if the arrangement will actually prove beneficial to you are not.

Salary sacrificing Super

Salary sacrificing superannuation from your pre tax income has benefits – not only for you but your employer. The sacrificed component of your total salary package is not counted as assessable income for tax return purposes. This means that it is not subject to pay as you go (PAYG) withholding tax. Your employer will not be required to pay Fringe Benefits Tax FBT on the extra Super contributions and they will be able to claim extra expenses to lower their profits to reduce their tax. For you as an employee you can put extra cash in your super. The extra tax in super will be taxed at 15% flat rate and there will savings equal to the difference between your marginal tax rate. Plus you will be growing your super. But be careful do not put too much super into your Superfund account. Salary sacrificed super contributions are classified as employer super contributions, rather than employee contributions. This reduces the amount of super guarantee contributions that your employer is required to make for you, unless the terms of the agreement between you and your employer specify that they continue to pay the minimum super guarantee amount. Nowadays the total super contribution cap is $25,000 a year. Let’s see an example for this.

There are certain conditions which Australian Tax Office and advised to be followed when entered into salary sacrifice arrangements.

Effective salary sacrifice

The requirements for an effective salary sacrifice arrangement are:

  • the arrangement should be entered into before you perform the work
  • there should be an agreement between you and your employer – the contract is usually in writing, but may be a verbal one
  • there should be no access to the sacrificed salary – the sacrificed salary must be permanently forgone for the period of the arrangement.[Source: Australian Taxation Office]

Salary sacrificing is not for everyone but if you have doubts or have queries please contact me at support@eazytax.com.au

Other Technical Resources to read: