The start of the tax year is a great time to see where you can do things better over the next twelve months. One area that can be hugely beneficial, but often goes a bit under the radar, is salary sacrificing.
So let’s cut through the tricky tax talk and take a look at how it can be a bonus for your finances.
Salary sacrificing is an arrangement with your employer which involves paying for something out of your pre-tax salary.
The advantage is that you are usually being taxed at a rate which is lower than your income tax, so you’re saving money on the purchase.
The other big benefit is potentially pushing you into a lower income tax bracket, because the amount sacrificed does not appear as part of your take home earnings.
The most common use is for superannuation payment plans where there is often a big tax saving to be made. The amount sacrificed from your income to be paid into super is taxed at 15%, which means for most people this is a smart thing to do.
If you’re in a higher income bracket paying upwards of 46% income tax, your super fund will grow a whole lot quicker by sacrificing a monthly amount directly from your employer.
You need to be aware that there are caps on the contributions you can make into super, with excess contributions copping a penalty tax. For the current financial year there are two caps to take down; $25,000 for anyone aged 59 or under; and $35,000 for anyone aged 60 years or over.
These caps include your compulsory employer contributions too, so be sure to factor them in when calculating how much you can contribute.
Goods & Services
When it comes to arranging salary sacrifice payments for goods, it becomes a little more complex.
Like with super, you can arrange to pay for things like laptops, cars and education under a salary sacrifice plan, but while you are cutting out one set of taxes this way you may be subject to a whole other set.
Changes in tax thresholds and salary sacrifice conditions mean that paying for some things this way is not a great idea.
The recent changes to the Fringe Benefits Tax treatment of cars is an example of how much tweaking goes on in the area.
The FBT applies to certain things that people often like to pay for through salary sacrifice, like cars, property, or expense payments. Things that do escape the FBT include computers predominantly used for business, other electronic devices, computer software, and tools of trade.
One of the most popular items to salary sacrifice is a laptop, where the rules provide for one FBT free computer per year as long as it is used for work purposes the majority of the time. This also applies to renting laptops, enabling you to upgrade with a new one after the rental contact expires.
However for things that aren’t FBT exempt, like cars, travel, subscriptions and office expenses, it’s a matter of weighing up your personal tax situation and talking to your employer to see whether it’s going to be a beneficial arrangement.
There is also the administrative side for employers to consider, which means that not everything is available to salary sacrifice in all jobs.
That said, there is no harm in asking your employer and having a quick chat with the business accountant to identify mutually beneficial tax ground.
It’s worth noting here that charities and not-for profits have a much wider net of FBT free options, including a lot of daily living expenses, so if you’re in this sector be sure to dig into the full range available.
But before getting into any arrangement, you need to investigate what sort of taxes an item will attract before you decide whether it’s a good option or not.
Generally, unless you’re in a top income bracket, salary sacrificing is only worthwhile when you can avoid the FBT.
And never forget the risks involved with salary sacrificing too, be it a computer or your super.
Sacrificing part of your salary means you will take home less disposable income, so make sure that your budget will allow for this beforehand.
Also be sure to monitor the payments regularly since it’s your employer who will be making them.
All that said, it can be a very tax effective strategy, so take the time to explore your options and improve your financial prowess this financial year.