Salary sacrifice is an arrangement with your employer to swap part of your salary for benefits which are paid for or provided by the employer.
Packaging benefits in a salary agreement has long been popular, because of the progressive structure of the Australian income tax table.
“Progressive” in this context means that the higher your taxable income, the higher the tax rate. The tax scale increases in progressive steps.
For example, see the personal income tax scales.
A salary packaging arrangement which removes potential income from the progressive tax scale and replaces it with a benefit of equivalent or higher value provided by the employer, would on the face of it save (up to) 47 cents for every dollar of income replaced.
Note that the comparative advantage of packaging super in particular has been removed by allowing individuals to deduct self self-contributed super up to $25,000.
There are also a number of benefits which are explicitly excluded from inclusion in a salary packaging arrangement. See further on this: Is the sun setting on salary packaging?
Salary packaging super – preventing exploitation of the “super gap”
An amendment to the super guarantee laws has been passed by parliament which would prevent employers exploiting the relationship between salary packaging and the super guarantee requirements.
The new law takes effect from 1 January 2020 and prevents salary-sacrificed superannuation contributions being counted as part of the employer’s superannuation guarantee obligation.
When a nominal salary is divided into salary plus voluntary super contributions, the law previously allowed employers to count the salary sacrificed super towards its super guarantee obligation calculated on the (reduced) salary component of the package.
See further: GN 2020/1 Salary sacrifice and super guarantee
For details of the legislation see Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019
FBT – the tax system’s antidote to salary packaging
The Fringe Benefits Tax (“FBT”) was introduced to counteract this tax benefit, by imposing a tax-deductible tax on the employer at the rate of 47% of the grossed up benefit including GST. The FBT formula is designed to balance the after-tax value of the benefit.
Why salary sacrifice?
The answer lies in the fact that for some benefits, the tax impact is lower when the benefits are paid for under a salary sacrifice agreement, than if paid for by the employee directly.
This happens when:
- the tax law arbitrarily assigns lower values to the benefits for FBT purposes, and;
- there are concessions and exemptions available, for example for certain non-profit organisations or in relation to specific kinds of expense
The aim is to replace salary with a benefit with a taxable value which is significantly less than the actual, market or cash value, or is completely exempt, to produce a higher after-tax cash flow for the employee, whilst being tax-neutral for the employer.
In the best case scenario, tax on the employee’s salary at the top marginal rate is avoided, with zero FBT payable by the employer.
When Salary Sacrificing May Not Be Worthwhile
Salary packaging does not automatically provide an advantage.
- some benefits are explicitly excluded from packaging arrangements
- being able to deduct personal super contributions removes the need for a packaging arrangement to achieve the same thing
- whether there is a statutory formula (such as for vehicles) or rule which provides a favorable tax valuation, exemption or exclusion of the benefit. Higher kilometre vehicles with heavy private use can have an FBT advantage using the statutory formula method.
- whether the value of benefits counts as income when qualifying for some government concessions or charges, e.g. medicare – See Reportable Fringe Benefits. Depending on circumstances, the value of concessions could out-weigh the value of the fringe benefits.
- whether the employee’s salary reaches the top or one of the lower marginal tax rates. Lower-than-top marginal tax rate taxpayers most likely would have little to no benefit from packaging expenses (except for exceptions, e.g. the vehicle example above).
- whether the benefits are relatively trivial, and/or outweighed by administration costs or the inconvenience of the necessary record-keeping for FBT compliance purposes.
The cash flow consequences of a salary sacrifice arrangement are crucial.
In the example above, the employee “sacrifices” (i.e. reduces) her salary by directing $10,000 into a super fund.
As a savings device it may make sense, but since the proceeds of superannuation are not usually available until retirement age, the employee has to manage in the meantime without the extra cash, which is a potential cash flow issue.
It would cost the employee more (by the amount of the tax) than if paid by the employer on a non-taxable or reduced tax value basis. Car benefits can fall into this category, as can other FBT exempt or concessional items.
Negotiation with your employer:
Another practical consideration is the willingness or otherwise of your employer to “play ball” by packaging expenses, which necessarily involves a level of administration work, compliance and usually the oversight of a tax professional to ensure it’s done properly on an on-going basis. Salary packaging calculations can be complex.
To successfully salary-sacrifice, you need:
- a demonstrated benefit based on your tax position
- acceptable cash flow after implementation
- co-operation from the employer
- professional advice to ensure compliance (and hence be tax-effective)
This page was last modified 2021-06-30