It sounds misleading, but 'salary sacrifice' is not about giving your hard earned money away.
In fact, many people benefit from a salary sacrifice arrangement with their employer in order to use cars, phones and computers at a cheaper rate and minimise their income tax.
What is salary sacrifice?
A salary sacrifice is an arrangement between an employer and employee, where the employee agrees to forgo some of their wages that will be owed to them in the future, in exchange for the provision of benefits that equate to a similar value.
Also referred to as salary packaging or total remuneration packaging.
A good example of this when sales staff are offered a salary package which includes a reduced base wage but with the inclusion what are known as fringe benefits like a car and a mobile phone and a laptop. If the employee was to pay for these work related expenses out of their after-taxed income it would cost them much more and reduce their disposable income.
How to salary sacrifice
You might decide you want a new laptop. You're going to use it for both personal and work functions, so you ask your employer if the company will purchase the item for you (which the company claims as a tax deduction) and you agree to pay your employer back via your pre-taxed income. So your taxable salary might be reduced from $35,000 per year to $34,000 (if the item costs $1,000). You've benefited because you don't have to buy the laptop with your after-taxed dollars, so the relative cost to you for the item is smaller.
When considering whether salary sacrificing is right for you, make a list of all your essential expenditures and any regular repayments to ensure you’ll be able to cover these with a reduced monthly income.
When drawing up an agreement between you and your employer, always try to ensure that this is in writing rather than verbal to avoid any future wage disputes. The agreement should include details of your remuneration and state that you are able to renegotiate the arrangement at any time. This must all be arranged before the employee is entitled to the payment as salary sacrificing cannot be backdated.
Why salary sacrifice?
When you salary sacrifice you swap a portion of your regular pay for other workplace benefits. When you do this you don't have to pay income tax for your chosen benefits, so you have more disposable income after payday. Salary packaged benefits in Australia generally attract Fringe Benefits Tax however mobile phones and laptop computers are exempt from this.
Salary sacrificing benefits employees in two main ways:
- Fringe benefits: These can range from cars and laptops to financial help with school fees or the provision of a cheap loan.
- Superannuation: If the amount sacrificed is invested in superannuation, it will be exempt from fringe benefit tax. As the money is not taxed as income before it is paid into the fund, it means that long term there will be more money in the fund for less money contributed.
Risks and warnings
- Your disposable income will inevitably decrease (in the short term) with a salary sacrifice, so ensure you avoid any debt by only sacrificing a feasible amount for you.
- You may miss out on some of the benefits that only apply at top marginal tax rates.
- Make sure you check your statements thoroughly to ensure your employer has paid your salary sacrifice super contributions to your fund every 28 days to avoid missing out on interest.
- Read over your employment agreement carefully to ensure that any compulsory super contributions made by your employer are not reduced as a result of salary sacrificing into your super.
- Keep an eye on any new legislation, especially when the annual budget is issued. Any reductions in tax rates can mean that salary packaging expenses will not be as effective.
Although the thought of a new car, phone, laptop or extra super payments can be tempting, protect yourself from the risks of salary sacrifice and always ensure that it is the right choice for you. You should always seek financial advice before entering into a salary sacrifice arrangement.
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