What comes to your mind when you think about the word ‘sacrifice’? The majority of us would have thought about giving something up. However, when it comes to ‘salary sacrifice’, its meaning may be the opposite, i.e., you could potentially gain something out of it.
Salary sacrificing into super includes reducing your take-home pay to put away an amount of money from your retirement. In this blog, you will get to know what salary sacrifice means, how you can set up an effective arrangement, and the tax implications of this arrangement.
What is Salary Sacrificing or salary packaging?
Salary sacrificing is also called total remuneration packaging or salary packaging.
A salary sacrifice arrangement is when an employee agrees to receive less take-home income from the employer in return for benefits of similar value. These benefits will be paid out of the pre-tax salary of the employee.
But why would you agree to receive less take-home pay? Because doing so will result in you paying less tax on your income. A salary sacrifice arrangement can reduce your taxable income, and as a result, you will be paying less tax.
Benefits may include goods and services, such as a laptop or even a car, or voluntary contributions to the superannuation account of the employee.
How does salary sacrifice work?
Salary sacrifice is the arrangement made between your employer and you, but some employers also use a third party to facilitate salary sacrifice for the employees.
When this arrangement is in place, a deduction of an agreed amount from your pre-tax salary will start and will go towards the benefits over a predetermined period of time.
The salary sacrifice arrangement can start when you begin a new job, or you can start it after you have been working for the same employer for some time now. In both of these ways, you are able to salary sacrifice a portion of a future entitlement.
In simpler terms, this means you cannot salary sacrifice the salary or wages, bonuses, commissions or leave entitlements you accrued before entering into the arrangement, as stated by the Australian Taxation Office.
It is worth noting that an employer is not legally bound to allow it (salary sacrifice arrangement). However, most employers will.
What can you salary sacrifice?
Now let’s move on to what you can salary sacrifice. This will depend on your employer.
The most common benefits include contributions to your superannuation and the price of items like cars (generally through a novated lease), laptops and phones in exchange for an agreed portion of pre-tax salary or wages.
The Australian Taxation Office has stated that there’s no restriction on the kinds of benefits you can get from a salary sacrifice arrangement.
Fringe benefits
Many benefits that you may include in a salary sacrifice arrangement are fringe benefits. Your employer, in this case, will need to pay fringe benefits tax (FBT) on the value of the (fringe) benefits they provide you.
In case an employer needs to pay FBT, they may ask the employee to make an employee contribution to reduce the fringe benefits tax payable.
The most common Fringe benefits include:
- shares
- goods
- cars
- payment of your expenses for loan repayment, childcare costs and school fees.
Exempt benefits
An employer will not have to pay Fringe Benefits Tax on exempt benefits like:
- computer software
- protective clothing
- a portable electronic device
- tool of trade
- a briefcase
Superannuation
Here is the most talked about salary sacrifice arrangement because it can help you boost your retirement savings. You can choose to use a salary sacrifice arrangement to have some of your wages or salary paid into your super fund instead of being paid to you.
This will reduce your taxable income, meaning you will be paying less tax on your income. This is an extra payment on top of the superannuation guarantee contribution that the employers have to make. At the time of writing, the superannuation guarantee rate or SG rate is 11% of the ordinary time earnings of an employee.
These concessional contributions will be taxed in the super fund at the rate of 15%. For a lot of people/employees, this rate is less than the marginal tax rate applied to their salaries. The reason behind this is that the salary sacrificed super contributions are known as employer super contributions and thus are taxed at the concessional rates.
How much can I contribute?
Although there is no limit on how much one can salary sacrifice into super, you will have to pay accordingly to the concessional contribution cap. This cap is $27,500 per financial year. Concessional contributions exceeding this cap will be taxed at the marginal tax rate.
However, you must remember that the contributions made into your super (under the salary sacrifice arrangement) aren’t the only contributions that count towards this concessional contribution cap.
Other contributions that will count towards your concessional contribution cap generally include:
- Compulsory contributions that the employer has to pay under the super guarantee, which includes contributions from other jobs you might have held in the financial year.
- Contributions you make to your super using after-tax dollars, which you can choose to claim a tax deduction for.
What are employer super contributions?
Employer superannuation contributions are compulsory contributions that the employer must make into an employee’s super account. Since these contributions will count towards your concessional contribution cap, it will limit the amount you can sacrifice into super.
The amount of employer super contributions you will receive is based on your wage. As mentioned earlier, the employer will be required to pay 11% of your wage into a superannuation account every year.
Setting up a salary sacrifice arrangement
If you believe that salary sacrificing to your super is the right option for you, you can follow the given checklist to set up a salary sacrifice arrangement for it.
Ensure that your employer offers salary sacrifice
The first thing that you need to ensure is that your employer offers this type of arrangement. You can confirm this with your payroll team.
If not, you can achieve somewhat similar benefits by claiming tax deductions on your after-tax contributions. However, this will also need a lot of consideration on your side.
Decide when, how often and how much you want to salary sacrifice
Now, you will have to decide if you want to salary sacrifice on an ongoing basis or as a one-off. You also need to remember that you cannot salary sacrifice the income you have already received, for instance, leave entitlements or a bonus.
Thus, you will have to act well before this money gets paid into your regular bank account if you wish to salary sacrifice it.
Notify your employer
Now you need to contact your payroll team at work to have this arrangement in place. Provide the team with the information they require and request them to confirm in writing when your contributions will start being paid. In this way, you will be able to check if the contributions are being received into your super account.
Ensure that you do not exceed the concessional contributions cap
By now, you must have understood that you shall not exceed the concessional contributions cap. Otherwise, salary sacrificing may subject you to additional tax and penalties.
Is it worth salary sacrificing into super?
There are a lot of benefits of salary sacrifice contributions. Not only do you get to pay less tax, but you also end up saving up more money in your super fund for your retirement.
Whether your salary sacrificing into super is worth it or not for you, you will have to depend on your personal circumstances and objectives.
You will also need to be comfortable that the amount of salary sacrificed won’t be accessible until you are eligible to access your super.
In case you wish to seek advice regarding salary sacrificing, or your tax obligations, you can reach out to Clear Tax Accountants. We are a team of experienced tax accountants in Melbourne who provide professional advice on your tax matters. So, if you want to make this tax time easier for yourself, contact us today.
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