In one of my earlier blogs, you may have read about PAYG – W withholding tax. The tax that your employer takes out of your wages also known as income tax. If you work for an organisation that offers salary packaging, you can use some of your salary to pay for everyday expenses before income tax is calculated, meaning you pay less tax and have more money to spend.
A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging.
Your salary sacrifice needs to be arranged before you get paid and should be documented in your employment contract.
You can salary package benefits you would normally pay for with your after-tax income. But it depends on what your employer offers. Benefits fall into three categories: fringe benefits, exempt benefits and super.
Fringe benefits can include:
- Salary sacrifice for a car
- Health insurance
- Loans (usually for a car)
- School fees
- Child care fees
- Other personal expenses
Your employer pays fringe benefit tax (FBT) on these benefits. See fringe benefits tax on the ATO website for more information. The above salary sacrifices items more commonly set up in larger organisations.
- Portable electronic devices
- Computer software
- Protective clothing
- Tools of the trade
- Your employer will not have to pay fringe benefits tax on these
Putting some of your pre-tax income into super has benefits for you and your employer. Your super fund will tax these contributions at 15% – the same as your employer’s contributions. For most people this will be lower than their marginal tax rate.
Usually more ideal for the mature employee who will not be waiting 40 plus years before they access their super.
There are organisations who manage Salary Packaging for employees. You may be able to give yourself that head start in your finances by increasing your take home pay and paying off necessary expenses at the same time.
Before your race off to your employer you should consider things such as:
- Your debt level, can you afford to reduce your take home pay?
- Salary sacrifice is ineffective for low-income earners (less than $37,000)
- Your salary levels
- Salary Sacrifice amounts cannot be claimed as tax deductions
- Salary sacrificed amounts are counted towards your annual concessional (before-tax) contributions cap (super – $25,000 in 2020/21) so you need to take care not to exceed your cap.
For an example and for your reference on how it works, click here.
iGrow Business Services encourages you to speak with a Tax Advisor before signing up to any arrangements to make sure they are right for you.