Salary Sacrifice Explained

As an employer, it’s wise to understand as much as you can about payroll in Australia. Beyond compliance, there’s a slew of options and nuances when it comes to remunerating your employees – salary sacrifice is one of them.

What is salary sacrifice?

A salary sacrifice arrangement is where an employee agrees to give up part of their before-tax salary in return for benefits of similar value. It’s also called salary packaging or total remuneration packaging.

The sacrificed salary is paid by the employer towards the chosen benefit, which could be extra superannuation contributions, car lease payments, or more personal items such as school fees or childcare costs.

How does salary sacrifice work?

The employee agrees to use a portion of their pre-tax dollars to pay for an eligible benefit. The sacrificed amount is deducted from their gross salary before income tax is calculated.

Because salary sacrifice reduces their assessable income, their taxable income is reduced. They pay less tax on their salary, which can increase their after-tax income and take-home pay.

For employers, allowing salary sacrifice can be an attractive addition to an employee benefits package. It could help attract and retain staff at no extra cost.

Top tip: Be wary of salary sacrifice pitfalls. Common errors with salary sacrifice often include incorrect declarations in payroll tax returns.

For what reasons can an employee salary sacrifice?

An employee can salary sacrifice for a number of personal benefits and contributions, including:

• Superannuation: Salary sacrificed super contributions go into the employee’s superannuation fund as employer contributions, taxed at 15% inside the fund instead of their marginal tax rate.
• Novated lease: The employee uses pre tax salary for lease payments and costs of a motor vehicle.
• Electronic devices: A portable electronic device, such as a laptop or tablet, can be salary sacrificed and may qualify as an exempt benefit if used mainly for work.
• Other items: Some arrangements cover school fees, childcare costs, loan repayments and other personal expenses.

How does salary sacrifice affect income tax?

It lowers the employee’s pre tax salary, which means they pay tax on a smaller amount. The sacrificed amount doesn’t appear as income on their payment summary for income tax purposes.

Say an employee earns a gross salary of $80,000 and sacrifices $5,000 into super. They pay tax on $75,000 instead.

The result? Less income tax on their tax return and a better way to fund personal benefits.

However, the tax benefit depends on the employee’s marginal tax rate and the type of benefit. Always get financial advice or speak with a tax professional to understand the full tax implications.

Does salary sacrifice trigger fringe benefits tax?

It depends on the benefit. Super contributions aren’t fringe benefits, so you don’t pay FBT on salary sacrificed super contributions. They’re taxed at 15% inside the complying super fund.

Other benefits like a novated lease, an electronic device or benefits covering personal expenses can be classified as fringe benefits.

The employer will need to pay fringe benefits tax on the taxable value of the salary sacrificed amount. Some items qualify as exempt benefits.

Use the ATO’s FBT guides or speak with an advisor to learn your obligations before setting up a salary sacrifice arrangement.

How do you create an effective salary sacrifice agreement?

Every salary sacrifice arrangement has to be recorded in a written salary sacrifice agreement – separate from the employment contract.

The agreement should cover what benefits the employee receives, the sacrificed amount each pay period, how long the arrangement will last and more. It must also say that the employee won’t have access to the sacrificed salary.

Hot tip: Only allow salary sacrifice for future pay periods, never for work already done. When hiring new staff, flag the availability of salary packaging in your offer.

How much can an employee salary sacrifice per year?

For super, the concessional contributions cap is $30,000 every financial year, which includes employer super contributions, salary sacrifice contributions and any personal super contributions claimed as a tax deduction.

If the employee’s total super balance was under $500,000 at the end of the previous financial year, they can carry forward unused concessional cap amounts from up to five prior years.

For non-super benefits, there’s no dollar cap. But the employer needs to know whether they will pay FBT on the taxable value.

Check the specifics on the ATO’s concessional contributions page.

Does salary sacrifice affect payroll?

Yes. You have to adjust your payroll to include the salary sacrifice work for each employee.

Make sure you update your STP reporting, the employee’s payment summary, assessable income and employee contributions.

Use payroll software to track the sacrificed amount, employer contributions and any FBT obligations.

Good payroll systems automate all of these calculations so you can pay the right amount and stay compliant all year round.

What are the key considerations of salary sacrifice?

For employees, salary sacrifice can mean less tax on income, higher super balances and personal benefits at a lower cost. It’s very tax effective for people on higher marginal tax rates.

That being said, a lower salary could impact government benefits, loan repayments and how much the employee can borrow. Always get independent financial advice before entering any arrangement.

For employers, the main cost is admin. You need a written agreement, adjusted payroll and FBT management. Despite this, it could be a low-cost way to improve employee retention.

Speak to an advisor and read up on salary sacrificing for employees to get started.