Salary sacrifice (or salary packaging) is where you agree to take part of your wage as a benefit of some kind. This to be equal in value to the salary it is exchanged for. The upside is you doing this is that your income tax is then based only on the reduced amount of salary that results.
If your employer agrees to go into a salary sacrificing arrangement with you, the benefit you get should typically be equal to the GST-exclusive value to the portion of salary that you give up, plus any FBT that is payable by your employer. Options that may be allowed by your employer include a car, shares or payments for your expenses, such as school fees, child care or home internet connection costs for example.
There’s little restriction to the sorts of things you can ask for, but while you may have your own wish list, your employer might need to mull over whether or not any of them would fall within the ambit of the FBT regime. This is a crucial consideration for the employer, because while you get the benefit tax-free, the employer has to pay FBT on the value of the benefit.
Common fringe benefits you can salary sacrifice include:
- cars, (you can talk to us about novated leases, cars and FBT)
- property (which includes shares)
- expense payments (such as the payment of your loan repayments, school fees, child care costs and home internet costs — this also includes reimbursements of certain expenses).
On top of these, one of the most popular ones is salary sacrificing superannuation — more on this below.
Basically, there are certain benefits that, because they don’t generate more tax for your employer, might be more appealing. The following work-related items commonly provided in salary sacrifice arrangements are FBT-exempt benefits:
- a portable electronic device — eg. a tablet computer
- an item of computer software
- an item of protective clothing
- a briefcase
- a tool of trade.
FBT-exempt items can include things such as mobile phones, tools of the trade, and protective clothing. Laptop computers can be exempt within limitations, such as a work-only use. Your employer will also need to report certain benefits (“reportable fringe benefits”) on your annual tax payment summary where the total value of the reportable fringe benefits (that is, those subject to tax) exceeds $2,000. Excluded benefits and certain types of non-excluded benefits don’t count. This will not affect your assessable income or Medicare levy. The total will, however, be used to calculate entitlements to income-tested government support programs or benefits.
Topping up super, in addition to the minimum 9.5% that your employer pays, can be a popular option for salary sacrifice arrangements. There are several benefits for going down this path. For starters, any super put away under such a scheme to a complying fund are not considered fringe benefits and are not taxed to your employer as such. A bonus for your employer is that such super contributions also garner them an extra tax deduction (if you are under 75 years).
Within limits, super funds only pay tax on these contributions at a rate of 15%. This is probably less than the PAYG rates you would otherwise pay if you received the salary as cash. A super fund also only pays 15% tax on earnings (like interest) from the invested money. This again is probably less than what you’d pay if you earned interest on the money yourself.
Can salary sacrifice work for you? Contact Taxwise Australia if you want to learn more about salary sacrificing for yourself or as an employer.
© Content of this blog is in partnership with Taxpayers Australia