Salary sacrifice is an arrangement whereby your employer pays for goods or services on your behalf out of your pre-tax salary.
This can reduce your taxable income and increase your disposable income each pay period.
Any employee can salary sacrifice provided their employer is willing to offer the benefits.
Many employers provide salary sacrifice through a specialist salary packaging provider.
It is generally most effective for people on mid-to-high incomes but can be considered by anyone who pays tax – that is, if you earn over the tax-free threshold of $18,200 a year.
There are very few limits on what can be salary sacrificed; however, potential fringe benefits tax (FBT) can impact on the type of items that employers are prepared to offer.
FBT is paid by your employer and they often look to pass that cost on to the employee, which has the effect of equalising your pre-tax and post-tax salary, hence removing some of the financial benefits.
The most commonly salary sacrificed items are probably cars but the scope of salary sacrifice goes far beyond that. Here are five things you may not realise you could salary sacrifice:
One of the most effective salary sacrifices involves putting extra cash into your super fund to boost your retirement savings.
The great benefit of a super salary sacrifice is that it isn’t subject to FBT, which means the only tax payable is the 15% contributions tax. If your marginal tax rate is higher than that, the difference is your saving. The higher your tax rate, the bigger the saving.
Note, however, that your employer will only pay their normal superannuation obligations on your income after the salary sacrifice has been taken out, which reduces the benefit to you. There are also maximum amounts you can salary sacrifice before being taxed at more than the 15% contributions rate.
2. Portable electronic devices
Devices such as a laptop computer or mobile phone are free from FBT, making them ideal to buy via salary sacrifice.
However, to obtain the FBT exemption the devices must be used primarily for work.
In addition, only one a year can be provided, though this rule has recently been relaxed for small businesses (those with a turnover of less than $2 million), which are now able to provide their employees with more than one device a year (for example, a laptop and a phone).
If you need paid care for your children while you’re at work, you may be able to salary package the fees.
Typically, this can be done as long as the childcare facility is a registered provider. The provider may be a privately owned facility, one run by the local council or one operated by your employer.
Note, however, that salary packaging childcare fees may affect your entitlement to government benefits, as it can affect the gross value of your salary, so it’s important to take advice before you commit.
Childcare fees are also subject to FBT, which can reduce the benefit to the employee.
4. Lifestyle Options
It’s often possible to pay for expenses such as home loan or credit card repayments, private health insurance, rent, car parking and even school fees via salary sacrifice, depending on whether your employer is happy to help you do this.
Again, these expenses are generally liable for FBT so it’s essential to work out the numbers to ensure this will benefit you.
Many people buy their work tools using salary sacrifice.
That doesn’t just mean tools for tradies; it can include other work-related essentials such as a briefcase.
This is free from FBT, making it a good way to maximise the benefit of salary sacrifice.
Finally, it’s important to take advice before rushing into salary sacrifice.
Get help in considering the options and crunching the numbers to ensure it is right for you and talk to your employer about what they will offer.