Salary packaging, also commonly referred to as salary sacrifice, is a flexible financial arrangement between an employee and their employer. This arrangement allows you to optimise your income by allocating a portion of your earnings towards various benefits before taxes are applied. In essence, it’s a way to make the most of your compensation package by tailoring it to your specific needs and preferences.
How Salary Packaging Works
Salary packaging is a strategic financial manoeuvre wherein you agree to receive a reduced portion of your income post-tax, in exchange for your employer covering certain expenses on your behalf with your pre-tax earnings. These benefits can encompass a wide range of items, from a company car to a smartphone.
To illustrate, let’s say you have an annual salary of $100,000. By opting for salary packaging, you could structure your compensation in the following manner:
- $85,000 as your taxable income
- $15,000 allocated for a company car as a non-cash benefit
By adopting this approach, your taxable income drops to $85,000, which may lead to a decrease in your overall income tax liability. However, it’s important to note that salary packaging arrangements must be established before you receive your paycheque; you cannot restructure your salary once it has been paid out.
It’s worth mentioning that salary packaging tends to be most advantageous for individuals with middle to high incomes. For personalised guidance on whether salary packaging is the right choice for you, seeking professional tax advice is advisable.
For further insights and detailed examples of different salary packaging scenarios, visit the Australian Taxation Office (ATO) website under the ‘Salary Sacrificing for Employees’ section.
What You Can Include in Your Salary Packaging
The array of benefits you can include in your salary packaging arrangement depends on your employer’s offerings. Nevertheless, some common items that can typically be packaged include:
- Computers: Salary packaging can cover the cost of computers or other electronic devices that you would typically purchase with your after-tax income.
- Cars: Many employers offer the option to salary package a car, which can be particularly advantageous due to potential tax savings.
- Child Care: Child care expenses can also be included in your salary packaging plan, easing the financial burden of childcare services.
- Superannuation: Most employers allow salary sacrificing into superannuation funds, offering potential tax benefits and helping you plan for retirement. These contributions are typically taxed at a rate of 15%, which may be lower than your marginal tax rate.
Different Types of Benefits
Benefits that you can salary package generally fall into three categories:
- Fringe Benefits: This category includes benefits such as salary sacrificing for a car, health insurance, loans (often for a vehicle), school fees, childcare fees, and various personal expenses. Employers are typically required to pay Fringe Benefits Tax (FBT) on these benefits. For comprehensive information on FBT, consult the ATO website.
- Exempt Benefits: Exempt benefits consist of items like portable electronic devices, computer software, protective clothing, and tools of the trade. Employers are not obligated to pay FBT on these items.
- Superannuation: Allocating part of your pre-tax income to your superannuation fund benefits both you and your employer. Super contributions are taxed at a rate of 15%, which is usually lower than most individuals’ marginal tax rates.
Note for Not-for-Profit Organisations
It’s important to note that not-for-profit organisations often enjoy an FBT exemption. This exemption allows them to provide fringe benefits to their employees without incurring tax on those benefits, making salary packaging even more appealing in this sector.
Salary packaging is a powerful financial tool that can help you maximise the value of your compensation package while optimising your tax situation.
Ready to unlock the full potential of your salary and explore the benefits of a tailored compensation package? Get in touch with us now to embark on your journey towards a more tax-efficient and rewarding financial future.