What Is Salary Sacrifice?
The aim of salary sacrifice (packaging) is to enable an employee to receive a combination of income and benefits in a tax-effective manner.
The key to tax-effective salary sacrifice is for the employee to take some of their remuneration in the form of concessionally taxed benefits instead of taking it all as fully assessable salary. This procedure is called 'Salary Sacrifice' because the employee sacrifices some part of their salary in return for the desired benefits.
Packaging needs the agreement of both the employer and employee. For the employer, packaging has some advantages, such as the ability to attract employees. It may also act as an incentive to increase productivity.
However, the administration costs need to be considered. As such, some employers only offer limited forms of packaging.
What can I salary sacrifice?
The most common salary packaging items are:
- car fringe benefits (i.e Novated Lease)
- expense payment fringe benefits (incl. otherwise deductible)
- living away from home allowance fringe benefits
- car parking fringe benefits
Agreement between you and your employer
You should always get an agreement in writing between you and your employer clearly stating all the terms of the salary sacrifice arrangement. This contract, although generally put in writing, may also take a verbal form. However, if you chose to enter into an undocumented salary sacrifice arrangement (verbal agreement), you may have difficulty establishing the facts of your agreement.
Always make sure that an agreement is put in place between you and your employer before the work is performed. If the arrangement is put into place after the work has been performed, the salary sacrifice arrangement may be ineffective.
Benefits of salary sacrifice
The advantages of salary sacrifice are that you are buying the benefit in pre-tax dollars. That is, if your tax rate is 32.5%, you get 32.5% better buying power.
Example: Say an individual earns $100,000 a year and wants to buy a new car for work purposes, worth $22,000. Had they entered into a salary sacrifice agreement with their employer, the $22,000 for the car would be taken out of their taxable income. Therefore they end up in the lower tax bracket with a $78,000 income and a tax free car.
- The above calculations have not taken into account Fringe Benefits Tax (FBT) as this depends on a few factors:
- Does your employer pay the FBT?
- Do you reimburse your employer for the private use?
- The private use of the car affects the FBT payable.
- Some benevolent institutions do not pay FBT.
- FBT is payable by the employer, not the employee.
- Many salary package deals require the employee to reimburse the employer for the FBT costs out of the salary package.
Further points to note:
- Motor cars are subject to FBT but have concessional rates according to private use.
- Expenses such as school fees, personal expenses and mortgage payments attract Fringe Benefit Tax which is based on the top marginal rate of tax.
Fringe benefits tax free items
A number of benefits are exempt from fringe benefits tax (FBT), including these work-related items commonly provided in salary sacrifice arrangements:
- a portable electronic device
- an item of computer software
- an item of protective clothing
- a briefcase
- a tool of trade.
The work-related items exemption is limited to:
- items primarily for work-related use
- one item per FBT year for items that have a substantially identical function, unless the item is a replacement item.
Note that the one item rule does not apply to small businesses (defined as those with a turnover less than $10 million from 1 July 2016). That means multiple work-related items can be provided FBT free, for instance a phone and a laptop.
If salary sacrificed super contributions are made to a complying super fund, the sacrificed amount is not considered a fringe benefit for tax purposes.
The amount of the contribution will not be liable to fringe benefits tax and the contributions will not be included as a reportable fringe benefit amount on the employee’s payment summary. Salary sacrificed contributions are treated as employer contributions.
As superannuation contributions are not subject to FBT and are not reportable benefits, they are attractive to salary package. The amount that is salary sacrificed is taxed in the superannuation fund at 15%. An employee on 30% marginal rate will save 15% tax on every dollar that is salary sacrificed into super. The employee on higher marginal tax rates will have higher savings.
Concessional contributions cap
Salary sacrificed contributions to a super fund form part of the ‘concessional contributions’ in the fund. Employer contributions made under the super guarantee also form part of an employee’s ‘concessional contributions’.
Concessional contributions are included in the assessable income of the fund and taxed at 15%. However, there is a cap on the amount of concessional contributions that each member can enjoy each income year. If a person has contributions made to more than one superannuation fund, all contributions are aggregated.
For the 2016/2017 year, the concessional contributions caps have not changed. If you are aged 48 years or under on 30 June 2016, your concessional cap is $30,000 for the 2016/2017 year. If you are aged 49 years or over on 30 June 2016, the cap is $35,000 for the 2016/17 year.
From 1 July 2017, the amount of concessional contributions you can make will fall to $25,000.
Exceeding the concessional contributions cap
If the concessional contributions cap is exceeded, any excess concessional contributions are included in the assessable income for the corresponding year and taxed at the person’s marginal tax rate. They are also liable to pay the excess concessional contributions (ECC) charge.
If the concessional contributions cap is exceeded and the calculated tax liability for the year includes the excess contributions, the ATO then applies a 15% tax offset which takes into account that contributions tax has already been paid on the excess by the super fund provider.
The ATO also allows for a withdrawal of up to 85% of the excess concessional contributions from the superannuation fund which can be used to pay the tax liability arising from excess concessional contributions. Any excess concessional contributions withdrawn from the fund also no longer count towards the person’s non-concessional contributions cap.
Looking for advice on salary sacrificing? We can help you out. Contact us today on 13 23 25 or visit us at your local office and book an appointment online.
This information is intended as a guide for H&R Block clients as an outline of how salary sacrifice works. You should seek further advice prior to entering such an arrangement.
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