Salary packaging reduces your taxable income and so reduces the amount of income tax you pay. Find out how it works and what can be packaged.
How salary packaging works
Salary packaging (also known as salary sacrifice) is an arrangement between you and your employer where you pay for some items or services straight from your pre-tax salary. You can salary package computers, cars, childcare and super, to name a few. This can reduce your taxable income and put more money in your pocket.
Your employer then has to pay fringe benefits tax (FBT) on the benefits provided to you. Some of these benefits will be listed on your end of year payment summary and are used to assess your Medicare levy surcharge, tax offsets, child support payments and other government benefits.
You must enter into a salary packaging arrangement before you earn the income. It can never be retrospective.
Who can salary package
You can salary package if your employer is willing to offer benefits. Most employers will offer salary sacrifice into super to all employees, but may restrict who can package other benefits. Ask your employer what they offer.
Salary packaging is usually more effective for people on mid to high incomes.
What can be packaged
There is no restriction on what can be packaged but the benefits fall into three categories: fringe benefits, exempt benefits and super.
Fringe benefits can include:
- Health insurance
- Loans (usually for a car)School feesChildcare feesOther personal expenses
The value of the benefits you receive each financial year will appear on your payment summary at tax time. You will not have to pay tax or Medicare levy on this amount.
There are also some benefits such as entertainment and car parking that will not appear on your end of year payment summary. These are called non-reportable fringe benefits.
Exempt fringe benefits are benefits you receive that will not be included in your payment summary. Your employer will not have to pay fringe benefits tax on these.
Exempt benefits include:
- Portable electronic devices
- Computer software
- Protective clothing
- Tools of the trade
Redirecting some of your pre-tax income into super has benefits for you and your employer. These salary sacrificed contributions will be taxed by the super fund at 15%, the same as your employer’s contributions. For most people this will be lower than their marginal tax rate. See contributing extra to super for more information on how this can benefit you.
Your employer is not required to pay fringe benefits tax on super.
See the ATO for more details on salary sacrifice arrangements for employees.
Case study: Jacqui salary packages her car
Jacqui has been offered a new job with a salary of around $100,000 a year. As part of her contract negotiations Jacqui has asked to salary package a new car. She has also asked if she can make additional contributions to super.
Jacqui’s new employer agrees to provide her with a fully maintained vehicle in exchange for $20,000 of her proposed salary. Jacqui also elects to salary sacrifice $5,000 a year into her super fund.
This means Jacqui will have a taxable income of $75,000 per year. The value of the motor vehicle will appear on her annual payment summary. The extra amount sacrificed into super will appear on Jacqui’s annual payment summary as reportable employer super contributions.
Jacqui also negotiates with her employer that they will continue to pay her super on a salary of $80,000 which is her cash salary before super salary sacrifice.
Special rules for not-for-profits
Most employers will have to pay fringe benefits tax on the value of benefits they provide to each employee, in excess of $2,000 per year. Non-profit organisations are exempt from fringe benefits tax up to certain limits, depending on the type of organisation.
This means not-for-profits can provide non-cash benefits to employees more cost effectively than many other companies. Not-for-profits can also provide cash benefits such as entertainment and loan repayments from pre-tax income, which makes salary packaging attractive to their employees.
Talk to your employer to see what salary packaging they offer. You might want to get professional advice to work out if salary sacrificing is right for you.
Reproduced with the permission of ASIC’s MoneySmart Team.
Important note: This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.