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 we 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.

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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, 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:

                                • Cars
                                • 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).

                                This is how the ATO recoups the money it loses from the employee's reduced tax bill. Fringe benefit tax is calculated by grossing up the taxable value of the benefits provided. This equals the income the employee would have to earn to buy the benefits themselves. This is then taxed at the highest marginal rate (47%).

                                For example, let's say Cody is a small business owner who allows his employee, Joe, to salary sacrifice the cost of his golf club membership ($7,500). The gross up rate of a GST inclusive fringe benefit is 2.0802, so this is the equivalent of paying Joe an extra $15,601.5 ($7,500 x 2.0802). Cody will need to lodge an FBT tax return and pay his liability of 0.47 x $15,601.5 ($7,332.71).

                                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
                                • Briefcase
                                • Tools

                                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.

                                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 $27,500 per financial year. Concessional contributions exceeding this amount can be taxed at your marginal tax rate (e.g 32.5% if you earn between $45,001 and $120,000, 37% if you earn $120,001-$180,000) plus an additional charge.

                                Under the government’s First Home Super Saver Scheme (FHSSS), first home buyers can withdraw up to $50,000 in voluntary super contributions to go towards their first property. If you’re saving up to buy your first home, instead of setting aside a portion of your wages each week, salary sacrificing into your super can be a great way to grow your savings quicker through reducing your tax bill.

                                Apart from the FHSSS and a few other special circumstances, money you put into your super can’t be accessed until retirement. You’ll want to remember this before you start salary sacrificing. If you can’t afford to forgo this amount each week and not have access to it until you retire, it might not be a good move.

                                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 let you 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.

                                Firstly, 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 enough to cover your home loan.

                                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.

                                Savings.com.au’s two cents

                                In Australia, we have a progressive tax system, so the more you earn, the more you’re taxed. This means that salary sacrificing generally is more beneficial to middle to higher income earners, because a reduction to their taxable income translates to a bigger cut to their tax bill. However, according to ASIC’s Moneysmart, salary sacrificing can generally be tax effective for anyone earning more than $37,000.

                                If you earn above this threshold, salary sacrificing to reduce your taxable income and take advantage of some of those benefits is something to consider. As with any decision like this, be sure to seek independent financial advice that takes the particulars of your situation into account.