Salary sacrificing or salary packaging is a common arrangement utilised by a lot of employers and employees whereby the employee agrees to forego part of their future salary in return for a benefit of a similar monetary value provided by the employer.

The most common types of benefits provided by employers are superannuation and cars as they carry a number of benefits.  Salary sacrificed superannuation contributions reduce your taxable income which reduces the tax payable, as well as being tax deductible and exempt from fringe benefits tax (FBT) for your employer.

Below is an example that demonstrates the benefits of salary sacrificing super:

Salary packaged super:

No salary packaging Salary packaging Tax saving
Salary $80,000 $80,000
Less salary sacrificed super $0 $15,000
Taxable income $80,000 $65,000
Less income tax (2016/17 rates) $17,547 $12,672 $4,875
Less Medicare 2% $1,600 $1,300 $300
Net income after tax $60,853 $51,028
Tax saving $5,175

Benefit:

In addition to the tax saving, the outcome in this example is a significant positive contribution of $15,000 into a low tax environment for growth for eventual retirement.

Salary packaging a car (novated lease):

This has its benefits too, if done correctly, but is generally subject to FBT.  Not only does an employee enjoy the private use of a salary sacrificed car, but also the employer can benefit from the arrangement as the concessional valuation rules for FBT are available, and if the employee makes after-tax contributions to the employer for the provision of the car, that can save the latter on FBT costs.  Novated leases are a highly popular method of salary sacrificing cars as the employee can have a work car of their choice as well as increase their net disposable income.

The example below demonstrates the increase to an employee’s disposable income by salary packaging a car and making after-tax contributions towards the running costs of the car to reduce FBT payable by the employer to nil. This arrangement is commonly known as a novated lease.

No salary packaging Salary packaging
Salary $80,000 $80,000
Less salary sacrificed contribution (car)* $0 $4,290
Taxable income $80,000 $75,710
Less income tax (2016/17 rates) $17,547 $16,153
Less Medicare 2% $1,600 $1,514
Less employee after tax contribution* – $6,000
Less annual car running costs** $10,643 –
Net cash salary $50,210 $52,043
Saving to net cash salary per year $1,833
Total saving over 5 year lease $9,165

 

* The part salary sacrifice, part after-tax employee contribution to running costs is as follows:

Salary sacrifice balance      $ 4,290

Net GST employer credit   $     353

After-tax contribution        $ 6,000

$10,643

** The National Tax and Accountants Association estimates the annual running costs of a $30,000 motor vehicle leased over 5 years, travelling up to 15,000kms pa, is $10,643.

 It is important that any salary sacrifice arrangement is proactive to be effective for the benefits to be reaped.  Contact us at BSN & Co to discuss if salary sacrificing is for you.