Salary sacrificing is a popular tool in Australian workplaces that allows employees to reduce their taxable income by receiving certain benefits from their employer in place of part of their salary. It’s a tax-effective way to manage expenses, increase superannuation contributions, and even drive a new car. But how exactly does salary sacrificing work, and what can you use it for?
In this guide, we’ll break down the ins and outs of salary sacrificing in Australia, explaining how it works, what you can salary sacrifice, and the benefits and potential pitfalls to watch out for.
What Is Salary Sacrificing?
Salary sacrificing or salary packaging, is an arrangement between you and your employer where a portion of your pre-tax salary is used to pay for certain benefits. The remaining salary, after the “sacrificed” portion, is taxed as usual.
By paying for expenses with your pre-tax income, salary sacrificing reduces your taxable income, which means you pay less income tax. It’s particularly beneficial for middle to high income earners who fall into higher tax brackets, allowing them to maximise their take-home pay while still enjoying specific benefits.
How Does Salary Sacrificing Work?
Salary sacrificing works through an agreement with your employer. Here’s a step-by-step breakdown of how it typically operates:
1. Negotiate with Your Employer
You and your employer agree to reduce your salary by a certain amount, which will be used to cover approved benefits like additional superannuation contributions, car leases, or other expenses.
2. Pre-Tax Payments
The agreed amount is deducted from your gross salary before tax is calculated. This reduces your taxable income, leading to potential tax savings.
3. Remaining Salary Is Taxed
After the deduction for the salary-sacrificed benefits, the remaining salary is taxed at your usual marginal tax rate.
4. Receive the Benefit
You receive the benefit you’ve chosen, such as a leased car, additional super contributions, or a laptop, without paying the full cost out of your after-tax income.
What Can You Salary Sacrifice?
There are a range of benefits you can salary sacrifice in Australia, but they generally fall into two categories: superannuation contributions and non-super benefits.
1. Superannuation Contributions
One of the most popular uses of salary sacrificing is to boost superannuation contributions. Under this arrangement, part of your pre-tax salary goes directly into your superannuation account. This is an effective way to grow your retirement savings while reducing your taxable income.
Salary sacrificing superannuation contributions is particularly useful for people looking to:
– Increase your Super balance while minimising income tax
– Take advantage of concessional (pre-tax) contribution limits, which currently stand at $30,000 for this financial year
2. Non-Super Benefits
There are many other non-super benefits you can salary sacrifice, including:
– Novated Leases for Cars: A novated lease allows you to lease a car using pre-tax income, bundling all vehicle expenses (such as lease payments, registration, insurance, and maintenance) into one payment. This can lead to significant tax savings, especially for those interested in electric vehicles (EVs) or other low-emission cars.
– Laptops and Work-Related Technology: You can salary sacrifice the cost of work-related technology, such as laptops, tablets, and mobile phones, which can be purchased through your employer’s salary packaging program.
– Childcare Costs: Some employers allow you to salary sacrifice childcare fees, which can help reduce your taxable income while covering the costs of child care.
– Health Insurance: In some cases, you can salary sacrifice your health insurance premiums, reducing your taxable income while ensuring your healthcare needs are covered.
Benefits of Salary Sacrificing
1. Tax Savings
The most significant advantage of salary sacrificing is the tax savings. By reducing your taxable income, you lower the amount of income tax you have to pay. This is particularly beneficial for middle to high-income earners who are in higher tax brackets.
For example, if you earn $100,000 annually and salary sacrifice $10,000 towards superannuation or a novated car lease, you’re only taxed on $90,000 instead of $100,000, reducing your tax bill.
2. Boost Your Super Balance
Salary sacrificing is a great way to increase your superannuation balance over time. By contributing pre-tax dollars to your super, you can grow your Super balance faster while paying less tax on your income.
3. Easy Budgeting for Big-Ticket Items
For items like cars, laptops, or childcare, salary sacrificing allows you to pay for these expenses without dipping into your after-tax income. This can make it easier to budget for big-ticket items without compromising your lifestyle or financial stability.
Potential Pitfalls of Salary Sacrificing
While salary sacrificing has many benefits, there are some potential pitfalls to be aware of:
1. Contribution Limits for Superannuation
If you choose to salary sacrifice to superannuation, make sure not to exceed the concessional contribution cap, which is currently $30,000 per financial year. Contributions above this cap may be taxed at a higher rate, which could negate the tax benefits of salary sacrificing.
2. Reduced Take-Home Pay
Because salary sacrificing reduces your gross salary, it also lowers your take-home pay. While you benefit from tax savings, it’s important to ensure you can still comfortably meet your day-to-day financial commitments with a reduced salary.
3. Fringe Benefits Tax (FBT)
Some salary-sacrificed items, like cars and certain non-super benefits, may attract Fringe Benefits Tax (FBT). This tax is usually paid by your employer, but it could be passed on to you, depending on your salary packaging agreement. Be sure to clarify this with your employer to avoid any surprises.
Conclusion: Is Salary Sacrificing Right for You?
Salary sacrificing is a great way to manage your expenses, reduce your taxable income, and potentially grow your superannuation savings. However, it’s essential to understand how it works, what you can salary sacrifice, and the potential tax implications.
For those earning higher incomes or looking to purchase big-ticket items like cars or tech equipment, salary sacrificing can offer significant financial benefits.
To make the most of salary sacrificing, speak with your employer or financial advisor to ensure that your salary packaging arrangement suits your financial goals and lifestyle.