Salary packaging is an arrangement where you agree to give up (sacrifice) part of your future cash salary as income in return for benefits of a similar value eg having an amount paid into superannuation as a before-tax contribution or towards another approved salary sacrifice benefit. Salary packaging can increase your cashflow and your savings capacity because you pay some of your usual expenses with pre-tax income.
As a result of the arrangement:
you pay income tax on the reduced salary or wages;
your employer may be liable to pay Fringe Benefits Tax (FBT) on the benefits provided;
salary sacrificed superannuation contributions are classified as employer superannuation contributions (rather than employee contributions) and are taxed in the superannuation fund;
your salary sacrificed super contributions cannot be used to reduce the minimum amount of SG your employer needs to pay for you (from January 2020); and
your employer may be required to report certain benefits on your income statement or payment summary which are used to assess your liability to the Medicare levy surcharge, tax offsets and other government benefits.
The agreement to sacrifice the agreed amount must be entered into prior to you earning the income, it can't be done retrospectively. It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement in writing to establish the facts of your agreement. Subject to the terms of any contract of employment or industrial agreement, employees can renegotiate a salary sacrifice arrangement at any time.
Types of benefits that can be included
Fringe benefits eg cars, property (including goods, real property such as land and buildings, and shares or bonds) and expense payments (such as the payment of your loan repayments, school fees, child care costs and home phone costs).
Exempt benefits - work-related items such as electronic portable device (eg laptop), computer software, briefcase, protective clothing, tools of trade. Must be primarily for work related use and limited to one item per FBT year for items of substantially identical function, except if it is a replacement or more than one work related portable device provided by a small business in an FBT year, even if the devices have substantially identical functions.
Superannuation - salary sacrificed super.
How it works - eg salary sacrifice into superannuation
An employee chooses an amount to forgo from their salary and instead have it paid into super.
The employee's before-tax income is reduced by that amount. PAYG withholding tax is now calculated using the new lower 'gross' wage amount.
The amount paid into super is treated as an employer paid concessional contribution
Concessional contributions are subject to 15% contributions tax on receipt by your super fund.
Below is an example showing the taxation savings of $1,950 can be achieved from salary sacrificing $10,000, where on a gross annual salary of $100,000 (based on the 2020-21 tax rates and ignoring any tax offsets).
Depending on your personal financial situation you may pay less tax and have more take home pay than if you were making after-tax contributions. Superannuation contributions are generally taxed at a lower rate than your salary (15% in your super fund). Therefore, by diverting part of your salary to your super before tax is calculated and deducted, you may pay less tax on that amount.
Is there any downside to salary sacrificing?
As a contributions tax is deducted from these contributions, members in super schemes that are required to contribute a specified percentage of their salary may need to increase their before-tax contribution to ensure the final contribution amount in their super account is correct.
Eligibility for certain Government benefits such as family tax benefits or the co-contribution for super, are actually calculated on an adjusted income amount which may include salary sacrifice super contributions as income. So while for tax purposes, your salary is reduced under a salary sacrifice arrangement, you may not be eligible for certain benefits as eligibility is based on your pre salary sacrifice income amount, not on taxable income.
Salary sacrifice super contributions are shown on your Payment Summary/Income Statement as Reportable Employer Superannuation Contributions (RESC). Your super contributions are preserved in the superannuation system until you permanently retire or satisfy another condition of release.
You may pay extra tax if you exceed your total concessional contributions cap as this cap also includes salary sacrifice contributions. Note that salary sacrifice contributions are concessional contributions which means they don't attract the the Government co-contribution.
Concessional contributions limit
Salary sacrifice contributions count towards your concessional contributions cap/limit of $25,000 in 2020-21 (increased to $27,500 from 2021-22). You need to consider whether the amounts of salary sacrifice contributions you want to make, in addition to your employer’s contributions to super, will put you over this concessional contributions limit.
Contributions that go over the limit are subject to much higher levels of tax. If you exceed the concessional contribution limits in any given year, your excess contributions will be taxed at a rate of 31.5%. This is in addition to the 15% superannuation contribution tax, which makes a potential tax liability of 46.5%. The excess contributions will also count towards the annual non- concessional contribution limit of $100,000 (in 2020-21).
Looking for advice on salary sacrificing? Contact HelloLedger today on 0490 033 038 and we can help you out.
This information sheet is intended as an outline of how salary sacrifice works. You should seek further advice prior to entering such an arrangement.