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.
