A salary sacrifice arrangement (also known as salary packaging) is an agreement between an employee and their employer where the employee forgoes part of their future entitlement to salary in return for their employer providing them with benefits of a similar value. Not all employers offer salary sacrifice arrangements nor are they required to by law.
The requirements for a salary sacrifice arrangement to be effective are as follows:
- the arrangement needs to be in place before you perform the work (i.e. it must be prospective)
- there needs to be an arrangement between you and your employer (either written or verbal) and
- salary that is sacrificed must be permanently forgone
There isn’t any restriction on what salary can be sacrificed. The important thing is that they form part of your remuneration, replacing what would otherwise be paid as salary. Some of the most common types of salary sacrifice arrangements include fringe benefits, exempt benefits and super.
Fringe benefits include cars, property and expense payments.
Exempt benefits are benefits that are exempt from fringe benefits tax (FBT). Examples include software, laptops, protective clothing and tools of trade. The work-related items exemption is limited to items that are primarily for work-related use and limited to one item per FBT year for items that have substantially the same function (unless it is a replacement item).
Salary sacrificed super contributions under an effective salary sacrifice arrangement are considered to be employer contributions. These are not fringe benefits when paid for an employee to a complying super fund. However, contributions made on behalf of an associate such as your spouse will be considered a fringe benefit. The same applies to contributions made to non-complying superannuation funds.
What are the implications of salary sacrificing?
- Income tax paid is based on the reduced wage you are receiving
- Your employer may be liable to pay FBT on the non-cash benefits provided.
- Your employer may be required to report certain benefits on your payment summary.
- Salary sacrificed superannuation contributions are taxed in the superannuation fund under tax laws dealing specifically with this subject.
- Salary sacrificed super contributions are classified as employer super contributions, rather than employee contributions. This will reduce the level of superannuation to be paid by your employer when meeting their superannuation obligations
These are discussed in further detail below.
You only pay income tax on your reduced salary, but you receive the reduced salary plus the benefits. As such, your income tax liability should be less than it would have been without an arrangement. You can make employee contributions out of your after-tax income. These can be towards the cost of the benefits and reduce any reportable fringe benefits amount.
Fringe Benefits Tax
If there is any FBT payable on the benefits you received, your employer is liable to pay that tax. Your salary may be reduced by the amount of FBT paid by your employer as part of your salary sacrifice agreement.
If your employer pays for an expense that you would normally get a tax deduction for, your employer will not have to pay FBT on this expense. This is known as the ‘otherwise deductible rule’. If you salary sacrifice a deductible expense, you will not be able to claim an income tax deduction for this expense in your personal return.
Reportable Fringe Benefits
If the total taxable value of certain fringe benefits received by you in an FBT year (1 April to 31 March) exceeds $2,000, the grossed-up taxable value of those benefits will be recorded on your payment summary for the corresponding income year (1 July to 30 June). Grossing up reflects the gross salary that you would have to earn to purchase the benefit from after-tax dollars.
While this amount is shown in your tax return, it is not included in your assessable income. Instead, it is used to calculate:
- the Medicare levy surcharge
- deductions for personal super contributions
- the super co-contribution
- certain tax offsets
- the private health insurance rebate
- Higher Education Loan Program (HELP) repayments
- your child support obligations
- your entitlement to certain income-tested government benefits
As mentioned above, salary sacrifice contributions are counted as employer contributions. Your employer is only required to meet the 9.5% super guarantee so if you choose to sacrifice 5% of your salary, your employer will only be required to contribute the remaining 4.5%. As such, it is always better to have an agreement in place with your employer that clearly states that the employer will continue to pay the minimum 9.5% super guarantee amount, without including your extra contributions.
If you are interested in discussing how to establish an effective salary packaging arrangement, please contact one of the team at GeersSullivan on (08) 9316 7000.