Salary sacrificing can be an attractive way to buy the stuff you need while reducing your taxable income. But it’s not necessarily for everyone.
What is salary sacrificing?
Salary sacrificing basically boils down to using part of your pre-tax salary to buy things so you take home less after-tax pay. This means you reduce your taxable income and will hopefully pay less tax.
For example, you earn $100,000 a year, but receive $85,000 as income (less tax) and salary sacrifice $15,000.
What you can salary sacrifice depends on your employer. Generally, the larger the business you work for, the more likely they are to offer salary sacrificing to their employees. This is because the administration costs can really add up for a business. As a result, even larger companies will offer limited packaging options.
Common things to salary sacrifice are:
- Superannuation contributions
- Health insurance
- School fees
- Childcare fees
- Uniforms and work tools
- Electronic devices like mobile phones and laptops
Talk to your employer and investigate which options are right for you. There’s no point finding out how to salary sacrifice your car if your employer doesn’t offer it as part of their salary sacrifice arrangements.
Note also that you need to arrange your salary sacrifice package up front – you can’t package money you’ve already been paid. Superannuation is different, though, so read on for more information about that.
Salary sacrificing and superannuation
If you want to make additional contributions to your super, salary sacrificing is ideal. That’s because superannuation contributions made through salary sacrifice are taxed at 15 per cent. Which is considerably less than the 32.5 per cent marginal tax rate that you’re probably paying.
So, you get the benefit of reducing your tax, as well increasing your superannuation balance. Making extra contributions in this way is generally tax effective for anyone earning more than $37,000 per year. These pre-tax salary sacrificed super contributions are known as concessional contributions.
Note that the combined total of your employer’s regular superannuation contributions (for most this will be the super guarantee of 10 per cent of your salary, but it may be more for some) and your concessional contributions can’t be more than $27,500 per year.
Making super contributions beyond $27,00
Of course, you can still make additional super contributions (up to a value of $110,000 per year), just not through salary sacrificing.
You’ll need to make these from your take-home after-tax salary. These super contributions are known as non-concessional contributions, and there can still be a tax benefit to making them. Check out the ATO website for more information on this.
Using super contributions to save for a home
Salary sacrificing is a great option for anyone wanting to buy their first home. That’s because you can withdraw up to $30,000 in voluntary super funds (and any earnings) to put towards buying your home. The amount you can withdraw will increase to $50,000 on 1 July next year.
Say you earn $100,000 and salary sacrifice $17,500 into your super. You pay $2,625 tax on that $17,500 super contribution, compared to $5,687.50 you would have paid if you’d kept that money as take-home pay. So you’ve saved an extra $3,062.50 towards your home deposit via salary sacrificing your super.
You can find all of the rules for the First Home Saver Super Scheme here.
How it works with fringe benefits like cars
Taking on a novated lease is a popular arrangement, especially for people in the top tax bracket. This is where you lease a car and your employer takes the repayments and running costs out of your pre-tax income. You also won’t have to pay GST on the purchase price of the car, saving you a further 10 per cent.
At the end of the lease period (typically between two-five years), if you want to keep the car, you’ll need to pay any remaining financing as a lump sum from your usual take-home salary (ie, it’s not part of the salary sacrificing arrangement). If you haven’t budgeted for this you’re in trouble. You’ll need to either sell your car to raise the money to make the payment, or re-lease the same car or a different car. These options may not be in your best financial interests, negating any salary sacrifice tax benefits you had in the first place.
Another trip-up of novated leases is that they make it a bit too easy to buy a car you otherwise couldn’t afford. Don’t be tempted to over-stretch because salary sacrificing means you can afford higher repayments. That expensive car lump sum will get you in the end.
Talk to your employer about the option of paying other fringe benefits like your mortgage, children’s school fees or childcare costs through salary sacrifice.
Fringe benefits tax
Note that if there are fringe benefit tax (FBT) obligations on the benefit you receive, your employer is liable to pay that tax. They may take that tax from your salary as part of your salary sacrifice agreement.
If you work in the public health or NFP sectors, there are special FBT exemptions that make salary sacrificing even more attractive.
You can find out more about FBT obligations here.
Salary sacrificing electronic devices
Your employer might also allow you to salary sacrifice things like mobile phones, laptops and other electronic devices. This can be a good option for many, but there are two important rules to keep in mind.
- The device needs to be mostly for work purposes. That rules out anything you don’t use for work more than 51 per cent of the time. Including the kids’ laptops, phones, iPads, etc.
- You can only sacrifice portable items. Sorry, your television and desktop computer are out.
These expenses are generally not subject to FBT (see above). Also, when you salary sacrifice your electronics, you can’t then claim them as a deductible expense in your tax return. That’s because tax deductions can’t be claimed where an expense has been paid by an employer.
The first thing to do is talk to your employer to find out what’s on offer. Companies often have varied staff packages, depending on your salary and your job level. That means that just because your colleague leases his car through work, doesn’t mean you’ll get to do the same.
If you’re eligible for salary sacrificing, think about what you really need. Don’t decide to upgrade your phone, car or super balance just because you can package it. It might not make the best financial sense in the long term.
Run the numbers yourself, or talk to a financial adviser or tax accountant to figure out if it’s right for you. Salary sacrificing can be complicated tax-wise, so it’s best to get professional advice before jumping in.
This article contains general information only. Don’t rely on it for finance or tax advice. You should obtain specific, independent professional advice from a registered tax agent or financial adviser in relation to your particular circumstances and plans.