What is Salary Packaging and How Does it Work?

What is salary packaging?

Salary packaging or salary sacrifice is a mutual arrangement between you and your employer, where it is pre-decided that you will pay for some services or items directly from your pre-tax salary. For instance, you may salary package cars, computers, super funds, and child care, etc. The advantage of salary packaging is that it reduces your taxable income thereby enabling you to pay less tax and have more money in your pocket.

As per the arrangement, your employer needs to pay fringe benefits tax (FBT) on the benefits that have been provided to you. These benefits are listed towards the end of the annual payout summary. They are used to assess your income tax offsets, Medicare levy surcharge, child support payments, and other government benefits.

Salary packaging cannot be retrospective. You need to enter into the salary packaging arrangement with your employer prior to earning the said income.

How does salary packaging work?

Employees can set aside a portion of their pre-tax compensation through salary packaging to cover specific ATO-approved expenses such as superannuation payments, child care costs, and other work-related costs. As a result, they pay less in taxes overall due to less taxable income.

Usually, the employer is in charge of managing the procedure. Therefore, it’s crucial to take into account the restrictions, such as the $30,000 annual Fringe Programs Tax (FBT) ceiling, the effect on take-home income, and the potential impact on eligibility for government benefits. Additionally, employers must ensure that FBT regulations are followed and have a reliable method for reporting the benefits to the ATO.

In Australia, wage packaging enables employees to pay for specific things like meal entertainment and credit card expenses, using pre-tax income with pre-tax money. This may lower the total amount of taxes owed by the employee and raise take-home pay. The Australian Taxation Office has set limits on the amount that can be salary packed, though (ATO). Employers must also make sure that legislation governing the Fringe Benefits Tax (FBT) are followed and that benefits are properly reported to the ATO.

Can an Employee Willingly Participate in Salary Packaging?

Yes, as an employee, you can choose a salary package if your employer is willing to offer you certain salary package benefits. Most employers tend to provide salary packaging into super categories; Because by allowing employees to pay for specific items with pre-tax income, salary packing can increase take-home pay by lowering overall tax liabilities.

However, it may restrict who can package other benefits. Hence you must always ask your employer right at the beginning what benefits does it offer. The concept of salary packaging is more effective for employees who are in the range of middle to high income groups.

Which Benefit Categories can be Salary Packaged?

While there are no restrictions on what can be packaged, but the benefits are offered under the following three major categories: Exempt benefits, fringe benefits, and super.

Exempt Employee Benefit

Benefits under this category will not be included in your annual payment summary. Your company is exempted from employer paying fringe benefits tax on these benefits. Exempt benefits include the following: computer software, protective clothing, portable electronic devices, briefcases, and tools of the trade.

Fringe Benefits

These benefits that you receive every financial year appear on your annual payment summary at the time of taxation. As an employee, you will have tax free or Medicare levy on this amount.

Fringe benefits include the following: Health insurance, car loans, novated lease, child care fees, school fees, and other personal living expenses. A couple of benefits such as car parking or entertainment won’t appear on your annual payment summary. These benefits are termed as non-reportable fringe benefits.

Super Fund

Some of your pre-taxable income can be re-directed into this category. This is beneficial for both you and your employer alike.

These salary contributions are taxed by the super fund at 15%, which is the same as your employer’s contributions. For a lot of people, this is usually lower than their marginal tax rate. Your employer is exempted from paying fringe benefits tax on super.

Case Study

Judith has received a new job offer with a salary of around $100,000 per annum. As part of her contract negotiations, Judith has opted to salary package a new car. She has also wanted to know if she can make additional contributions to super.

Judith’s new employer agrees to provide her with a completely maintained vehicle in exchange for $20,000 of her proposed salary. Additionally, Judith also offered to salary package $5,000 per year into her super fund.

This means Judith will have a taxable income of $75,000 per year. The value of the car will appear on her annual payment summary. The extra amount that has been salary packaged into super will appear on Judith’s annual payment summary as it is reported per employer super contributions.

Judith also reached an agreement with her employer that they will carry on paying her super on a salary of $80,000 which is her take home salary before super salary sacrifice.

Special Rules for Non-Profit Organisations

Most employers need to pay FBT on the value of benefits they offer to every employee. However, non-profit organisations are exempted from fringe benefits tax (FBT exemption) up to a certain extent, depending on the type of organisation.

Hence these organisations can provide non-cash benefits to their employees more cost effectively as compared to other companies. Non-profit organisations can also provide cash benefits such as loan repayments and entertainment from pre-tax income in fbt year, which makes salary packaging attractive to their employees.

It is advisable that you have a word with your employer to understand what salary packaging they offer. You may want to get professional advice to work out if this salary sacrificing will be beneficial for you.

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