Did you know that salary packaging enables you to pay less income tax, increases your monthly take-home pay, and helps you make more money?
A salary package arrangement allows an employee and their employer to use a portion of the employee’s pre-tax income to pay for certain expenses and fringe benefits.
This blog shows how to create an effective salary packaging arrangement to increase disposable income.
What is Salary Packaging?
Salary packaging, or salary sacrifice, is an agreement between you and your employer to pay you less income before tax. In return, your employer pays for you certain expenses of similar value. Thus, a salary sacrifice arrangement reduces your taxable income, meaning you may pay less tax on your income.
How Salary Packaging Works
Salary sacrificing is a popular employment benefit that allows you to structure your remuneration to optimise income after tax. So, how does salary sacrificing work? The key steps in the salary packaging process are:
1. Agreement between employer and employee: You and your employer must agree on the salary sacrifice arrangement. This typically involves you electing to have a portion of your salary diverted to pay for approved benefits.
2. Selecting benefits: You can generally package a range of benefits to a salary sacrifice arrangement. What’s important is that these benefits are part of your pay, replacing what you would otherwise receive as salary.
3. Adjusting taxable income: The amount you elect to package is deducted from your pre tax salary. This reduces your taxable income, resulting in lower income tax and Medicare levy surcharge.
4. Salary packaging providers: Many employers outsource the administration of salary packaging to specialist providers. These providers manage the process, calculate the tax implications, and ensure compliance with ATO regulations. You pay the provider’s fees as part of an effective salary sacrifice arrangement.
Allowed Benefits for a Salary Sacrifice Arrangement
You can salary sacrifice a wide range of benefits, subject to your employer’s offerings and compliance with Australian Taxation Office (ATO) rules. Some of the most common salary package benefits include:
Fringe Benefits
A salary sacrifice agreement allows you to include certain fringe benefits, although your employer may pay fringe benefits tax (FBT) on the value of the benefit they offer you. Should your employer be required to pay tax on fringe benefits, they might ask you to contribute personally to help lower the FBT.
Common fringe benefits include cars, goods, shares, expenses for loan repayments, school fees and child support payments.
Exempt Benefits
Your employer need not pay FBT on exempt benefits, such as: a portable electronic device, computer software, protective clothing, a briefcase or a tool of trade.
Super Fund
Salary sacrificed super contributions made through a salary sacrifice arrangement are considered as employer super contributions. If your employer contributes them through a complying superannuation fund, these are not considered fringe benefits.
How Does Salary Packaging Affect Taxes, Super, and Government Benefits?
Entering into a salary sacrifice arrangement means you could pay less tax. However, salary sacrificed amounts and reportable fringe benefits may need to be filed on your income statement or payment summary. Before entering into a salary sacrifice arrangement, you should consider these potential impacts and associated costs:
Impact on Tax
Salary sacrificed amounts are not subject to income tax, but they are included in your income for the purpose of calculating eligibility for other government levies or payments.
If your income plus salary sacrifice contributions is less than $250,000 per year, you pay 15% tax on the contributions. If it’s more than $250,000, you pay 30% tax.
Impact on Super Fund
Your salary sacrificed employee contributions are in addition to your employer’s contributions or super guarantee payments, which your employer must still pay as though there was no salary sacrifice arrangement.
Impact on Government Benefits
Salary sacrifice arrangements can impact government benefits, such as Medicare levy surcharge, repayment of loans, tax offset eligibility, child support payments, and eligibility for certain benefits.
Benefits of Salary Packaging
Salary packaging is a mutually beneficial arrangement between employers and employees. It allows you to maximise your take-home pay and access valuable benefits, while also providing employers with a tool to attract and retain top talent.
Key benefits for employees:
- Increased take-home pay by reducing taxable income
- Tax savings on eligible expenses like superannuation, car leases, and more
- Access to benefits they may not otherwise be able to afford
- Enhance retirement planning
Key advantages for employers:
- Helps attract and retain talented employees
- Boosts employee satisfaction and productivity
- No additional cost to the employer, as administrative fees are typically passed to the employee
Overall, salary packaging is a flexible compensation arrangement that benefits both parties when structured and implemented properly.
How to Get Started with Salary Packaging
Salary packaging can significantly enhance your earnings by providing access to valuable benefits, and with the right guidance, you can maximise your earnings today. To get started with salary packaging, follow these steps:
1. Evaluate your financial situation, including income, expenses, and tax, to determine if salary packaging could be beneficial and consider your eligibility for various benefits.
2. Consult your employer’s payroll department or a salary packaging provider to understand your options, eligible benefits, and any limitations or restrictions.
3. Select the benefits that best suit your needs. Ensure the selected benefits comply with relevant legislation and do not incur additional costs for your employer.
4. Set up an effective salary sacrifice arrangement specifying the reduction in your pre-tax salary and the corresponding non-cash benefits you will receive.
5. Provide documents to facilitate the arrangement.
6. Review your salary packaging arrangement periodically and make any necessary adjustments to maximise the benefits and stay within applicable limits.
Remember, seeking independent financial advice is important to ensure salary packaging is the right strategy for your circumstances.
The Bottom Line
Salary packaging is a financial strategy that reduces taxable income by diverting a portion of pre-tax salary towards approved expenses and benefits. It can increase disposable income, improve retirement planning, and attract top talent. Consult your employer or specialist provider for specific benefits and to structure an effective salary sacrifice arrangement.
Get Superwise About Your Superannuation with Newcastle Financial Planning Group
Salary sacrificing superannuation is vital to your financial future in retirement as an Australian. Whatever stage you are at right now in your career, learning about how you can make the most of salary sacrifice and your long-term retirement savings plan is always good practice.
At Newcastle Financial Planning Group, we can provide the specialist superannuation advice, expert knowledge and guidance you need to help you make the right financial decisions for your superannuation strategy so you can confidently look forward to your future.
Call us or book online to secure your first appointment with us today and get started!
References:
https://moneysmart.gov.au/work-and-tax/salary-packaging
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