Most employees believe that salary sacrificing is confined to making contributions to super but there are opportunities to use it in other ways to reduce tax. This is an introduction to a complex topic that recommends professional advice.
When most people think of salary sacrifice they think of superannuation. It’s pretty easy to see why. If someone earning $100,000 a year takes the last $10,000 of that amount as cash salary, they will pay $3,900 in tax and the Medicare levy. Salary sacrifice that same amount as a concessional contribution to super and only $1,500 will be lost to tax.
The reduction in the annual concessional contribution cap to $25,000 (increasing to $27,500 effective 1 July 2021) limits the amount that can be salary sacrificed to super, so it’s worth remembering that there are other expenses that can be paid with pre-tax income under a salary packaging arrangement. This is subject to your employer’s agreement, of course.
The FBT effect
While pretty much any expense can be included in a salary package, including mortgage repayments, school/childcare fees and holidays on the French Riviera, your employer will be required to pay fringe benefits tax (FBT) on most of these. Usually both the value of the benefit and the amount of tax will be deducted from your gross salary. The problem is that the FBT rate is equivalent to the top personal marginal tax rate. So if you are not in that top tax bracket you will usually be worse off packaging most personal expenses; and if you are in the top bracket there’s little to be gained.
That said, there are some items that receive special treatment for FBT which can be worth packaging. And this can work really well for employees of some not-for-profit organisations.
Exceptions to the rule
Particular items that relate to your work are exempt from FBT so there can be a clear benefit in including them in a salary package, such as:
- portable electronic devices,
- items of computer software,
- protective clothing,
- a briefcase,
- a tool of trade.
While there’s a limit of only one of each type of device per year, you can always hand down this year’s model to the kids when you upgrade next year.
Special tax treatment
Another popular item for salary packaging is a car; either one owned or leased directly by your employer, or one leased by you under a novated lease arrangement. While FBT usually applies, it is calculated on the ‘taxable value’ of the vehicle. Depending on a number of factors this may be less than the actual value of the benefit received, providing you with an overall financial advantage.
Your employer can pay expenses on your behalf that you would be entitled to claim as a tax deduction. In the long run this won’t put more money in your pocket, but you will receive the benefit sooner than if you have to submit your tax return and wait for your refund.
One thing to be aware of: your employer’s compulsory super guarantee (SG) payments only need to be paid on your salary component. Unless you negotiate otherwise, salary packaging can lower SG contributions.
Not-for-profit organisations, including hospitals and charities, enjoy a range of FBT exemptions or rebates. These open up some real opportunities for salary packaging by employees. Different caps apply depending on the type of organisation, but in some cases employees can effectively package benefits with a pre-tax value of over $15,000.
This article is a basic introduction to salary packaging. Whether you are an employer or employee, this area can be complex and the potential benefits depend greatly on individual circumstances. Before you do anything, talk to your Accountant and our office on (02) 9003 0611 to see if packaging is right for you.
ASIC’s MoneySmart website www.moneysmart.gov.au Salary packaging