For the uninitiated, the term ‘salary sacrifice’ doesn’t sound very appealing because no one wants to give up any of their hard-earned money, thanks very much.
But salary sacrificing can actually help you financially because it may help you reduce your taxable income, which could see you pay less at tax time. Salary sacrificing can also involve things like fringe benefits and exempt benefits which I promise are way more exciting than they sound.
Salary sacrificing can be quite complicated, so I’ll try to explain it as painlessly as possible.
In this guide:
- What is salary sacrifice?
- How does it work?
- What can you salary sacrifice?
- Benefits of salary sacrifice
- Salary sacrifice super
- Can you salary sacrifice your mortgage?
- Can you salary sacrifice a car?
- Is salary sacrifice worth it?
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What is salary sacrifice?
At its simplest, salary sacrifice is when you agree to receive less income before tax, in return for your employer to provide you with benefits of similar value. You’re basically using your pre-tax salary to buy something you would normally purchase with your after-tax pay.
How does salary sacrifice work?
So if you’re on a $100,000 income, you may agree to only receive $75,000 as income in return for a $25,000 car as a benefit.
Doing this would reduce your taxable income to $75,000 which could lower your tax bill because you’re essentially earning less as far as the tax office is concerned.
Salary sacrifice is sometimes referred to as salary packaging or total remuneration packaging, but for the sake of this article (and my sanity), we’ll just refer to it as salary sacrifice.
What can you salary sacrifice?
According to the Australian Tax Office (ATO), there’s no restriction on the types of benefits you can sacrifice, as long as the benefits form part of your remuneration. What you can salary sacrifice may also depend on what your employer offers.
The types of benefits provided in a salary sacrifice arrangement include fringe benefits, exempt benefits and superannuation.
Most employers allow employees to salary sacrifice into super, but not all employers will allow salary sacrificing for other benefits.
Benefits of salary packaging
1. Fringe benefits
Common examples of fringe benefits include:
- Property (including goods, real property like land and buildings, shares or bonds)
- Expense payments (loan repayments, school fees, child care costs, home phone costs)
Some less common benefits can even include gym memberships or free concert tickets, according to the ATO.
Your employer will typically have to pay fringe benefits tax (FBT) on these benefits, unless they qualify for an exemption (e.g. if they are a not for profit organisation).
2. Exempt benefits
There are a number of benefits that are exempt from the fringe benefits tax. These are known as exempt benefits and they can only be used for work-related purposes.
- Portable electronic devices (like laptops and phones)
- Computer software
- Protective clothing
Your employer typically does not have to pay fringe benefits tax on these.
How to salary sacrifice super
Salary sacrificing into your super involves reducing your take-home pay to put more money into your nest egg.
You can ask your employer to pay part of your pre-tax salary into your super account. This is on top of what superannuation your employer is likely already paying you under the Superannuation Guarantee, which should be no less than 9.5% of your gross (before tax) annual salary (though this may rise in the near future).
Salary sacrificed super contributions are classified as employer super contributions rather than employee contributions. These contributions are called concessional contributions and are taxed at 15%. For most people, this will be lower than their marginal tax rate.
How much super can you salary sacrifice?
There is a limit as to how much extra you can contribute to your super per year at the 15% tax rate. The combined total of your employer and salary sacrificed concessional contributions can’t be more than $25,000 per financial year. Concessional contributions exceeding this amount can be taxed at your marginal tax rate (e.g 32.5% if you earn between $37,000 and $90,000), 37% if you earn $90,000-$180,000) plus an additional charge.
Can you salary sacrifice your mortgage?
The short answer is yes, but it will depend on what company and industry you work in.
Typically, charity, health and not-for-profit industries allow mortgage payments to be salary sacrificed - but only for owner-occupier loans. Investment loans cannot be salary sacrificed.
If you’re unsure, check with your employer and the ATO as to whether you are eligible to salary sacrifice your home loan.
The next thing is to ask your lender if they allow salary sacrifice because not all lenders will allow you to salary sacrifice your mortgage repayments. If you’ve already got a mortgage, you may have to consider refinancing to another lender who does allow salary sacrifice.
Salary sacrificing your mortgage repayments can drastically lower your taxable income, thereby potentially generating significant tax savings. Such tax savings could be used to make extra repayments, which in turn could help you save big on interest costs.
However, there are a few things to keep in mind before asking your employer if you can salary sacrifice your mortgage repayments.
The first one is that your employer could simply refuse to do it because they think it will be too difficult or expensive to set up. They may also impose a limit as to what amount you can salary sacrifice towards your mortgage repayments each year. Depending on what this amount is, it may or may not be a sufficient amount to put towards your home loan repayments.
Can you salary sacrifice a car?
You can salary sacrifice a car by using a novated lease. Novated leases are complex to understand so we’ll try and make it simple.
A novated lease is essentially a contract between you, your employer and a finance provider. When you enter into a novated lease agreement, your vehicle repayments are made to a third-party finance company by your employer on your behalf. Those repayments come out of your pre-tax salary and fall under fringe benefits, incurring the fringe benefits tax.
Many people choose to salary sacrifice a car because of the tax break it provides. Because your employer is making the payments from your pre-tax salary, your taxable income is less, which means you’ll have a smaller tax bill. You could also avoid paying any GST because you haven’t actually purchased the vehicle and the employer is leasing it on your behalf.
However, if you lose your job, the car is still your responsibility (including the repayments).
Read on to find out more about how to salary sacrifice a car using a novated lease.
Is salary sacrifice worth it?
Salary sacrifice can be beneficial but it also has its drawbacks. For example, salary sacrificed super contributions could push you over the concessional (before-tax) contributions cap, which at the time of writing, is $25,000. What this means is that by exceeding the cap, you could be charged additional tax on any excess salary sacrifice contributions.
Generally speaking, salary sacrifice is more beneficial for middle-high income earners because there are little to no tax savings to be had for those on low incomes.
Savings.com.au’s two cents
While salary sacrificing can work for some people, it won’t be worth it for others.
Salary sacrificing is usually most effective for middle to high-income earners, while there are little to no tax savings for people who are already in a low tax bracket.
If you are a middle to high-income earner, then it may be worth considering salary sacrifice to reduce your taxable income and to take advantage of some of those benefits.
Before you do, make sure you seek independent financial advice and independent tax advice before entering into a salary sacrifice arrangement.
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