Salary sacrifice

Salary sacrificing is a taxation strategy that sees you give up a portion of your after-tax salary, in return for specific benefits. The benefits you receive are then paid out of the portion of your salary that you sacrificed, which remains un-taxed. This works to reduce your taxable income by the amount you choose to sacrifice.

Also known as salary packaging, this process needs to be agreed to by yourself and your employer.

The most common forms of salary sacrificing are for your superannuation, and on novated leases for vehicles. Here’s how they work.

Superannuation

Say your annual income is $100,000 plus super, and you’re considering salary sacrificing for your super. Under this method, you can choose to have a portion of your before-tax income paid directly into your super account. As this is technically classed as an employer super contribution, it gets taxed at the concessional rate of 15%, which is likely to be lower than your marginal tax rate.

If you choose to salary sacrifice $10,000 per annum into your super account, this means you’ll only pay your full marginal tax rate on $90,000 of your income. You’ll then pay 15% tax on the $10,000 you’re sacrificing.

Novated lease

Let’s say instead you’re looking at entering into a salary sacrifice arrangement to buy a new car. Under a novated lease agreement, this car costs $25,000 per annum for both the lease and its running costs. This means that $25,000 would essentially be taken out of your taxable income before tax, and you would only be taxed on the $75,000.  

This means you’re now in a lower tax bracket, so you pay a lower tax rate on your $75,000 salary. You’re essentially receiving a $25,000 benefit pre-tax.

There are three main types of salary sacrifice benefits.

• Fringe benefits. This covers things like cars, loan repayments, and childcare costs. Your employer is required to pay Fringe Benefits Tax on these types of benefits.
• Exempt benefits. This covers things like electronic devices, software, work clothing, and tools of the trade. These are considered work-related items, so your employer isn’t required to pay FBT on these.
• Superannuation. The most common form of salary sacrifice, these contributions are made directly to your super fund. This isn’t considered a fringe benefit, so FBT doesn’t apply.

Depending on your employer and the industry or sector you work in, you could be eligible to salary package a range of expenses, including:

• Additional superannuation
• Aged care & disability costs for a loved one
• Car parking
• Car fringe benefits (novated lease)
• Child care
• Clothing
• Certain insurances
• Financial advice
• Groceries
• Health insurance premiums
• Laptop/Mobile phone
• Rates
• Rent and Mortgage
• Utility bills

Salary sacrificing generally depends on your employer. Employers are required to pay FBT on certain salary sacrifice benefits to employees. There are certain industries that are exempt from FBT that are more likely to provide these benefits, however, all employers can still access salary sacrificing, you just need to be aware of the FBT implications.

Generally, most employees can opt into salary sacrificing as long as your employer is offering the benefit and the terms included. So be sure to check with your employer as to what they offer. Liston Newton Advisory is happy to assist you with your decision to salary sacrifice and help you understand the benefit that you’ll receive financially.

While there’s no limit on how much you can salary sacrifice into your super, there is a cap on the concessional contributions you can make. This currently sits at $25,000. Any concessional contributions that exceed this cap get taxed at your marginal tax rate, with an added excess concessional contributions charge on top.