Salary packaging, or salary sacrifice, can be a smart financial strategy that helps you reduce your taxable income and ultimately pay less tax.
For many Australians, this approach to managing their salary and benefits can lead to greater financial flexibility and long-term benefits.
In this guide, we’ll discover how salary packaging works, its advantages, and how you can make the most of it.
Let’s Get Straight to the Point
Salary packaging, or salary sacrifice, allows you to reduce your taxable income by receiving part of your salary as benefits like a car, health insurance, or extra superannuation contributions.
It’s most beneficial for those on middle to high incomes and can result in significant tax savings.
Before setting up a salary packaging arrangement, consult your employer’s policy. If it is available, seek professional financial planning and tax advice to ensure it aligns with your financial goals.
What is Salary Packaging and How it Works
Salary packaging is an arrangement where you receive a portion of your salary as benefits instead of cash income.
Essentially, you agree to sacrifice a part of your pre-tax income in exchange for certain perks or benefits your employer pays for directly.
This arrangement reduces your taxable income and may result in a lower tax bill.
Example of Salary Packaging
Let’s say you earn $100,000 annually. Under a salary packaging arrangement, you might decide to receive:
- $85,000 as cash income
- A $15,000 car as a benefit
In this case, your taxable income would be reduced to $85,000. By sacrificing part of your salary, you could benefit from a lower tax rate, resulting in more savings in the long run.
However, it is important to arrange your salary packaging before you get paid, as you cannot package your salary after it has been earned.
Who Benefits Most from Salary Packaging?
Salary packaging tends to be more advantageous for those on middle to high incomes.
This is because the potential tax savings are more significant when the sacrificed amount reduces your income from a higher tax bracket to a lower one.
Considering this strategy, it is wise to seek professional tax advice to determine whether salary packaging aligns with your financial goals. We would also recommend talking through your options with a financial advisor to make sure you do not breach any superannuation contributions rules.
For more detailed information, you can also visit the Australian Taxation Office (ATO) website, which provides examples of different salary packaging scenarios.
What Can You Salary Package?
You can salary package various items or services you typically pay for using your after-tax income. However, the specific benefits you can package depend on your employer’s offer.
Generally, benefits fall into three main categories: fringe benefits, exempt benefits, and superannuation.
1. Fringe Benefits
Fringe benefits can include items such as:
- Salary sacrifice for a car (novated lease)
- Health insurance premiums
- Loans, usually for a car
- School fees
- Childcare fees
- Other personal expenses
In these cases, your employer pays fringe benefits tax (FBT) on these benefits.
It’s important to consider the FBT cost, as it might impact the overall effectiveness of your salary packaging arrangement.
For more detailed information about fringe benefits tax, consult the ATO’s guidelines on fringe benefits tax.
2. Exempt Benefits
Some benefits are exempt from fringe benefits tax. These include:
- Portable electronic devices, such as laptops and tablets
- Computer software for work-related use
- Protective clothing and uniforms
- Tools of the trade or equipment necessary for your job
Since your employer won’t have to pay fringe benefits tax on these items, they can be an attractive option for salary packaging. This is particularly useful for employees who need these items for work purposes.
3. Superannuation Contributions
One of the most common forms of salary packaging is putting a portion of your pre-tax income into your superannuation fund. Both you and your employer can benefit from this arrangement.
Contributions made through salary packaging are taxed at a rate of 15%, which is typically lower than most people’s marginal tax rates. This can result in significant savings over time and boost your super balance for retirement.
For most individuals, sacrificing salary for super is an effective strategy, especially if they are in a higher tax bracket. To explore how salary sacrificing into super can benefit you, visit the ATO’s super contributions information page.
Salary Packaging for Not-for-Profit Employees
You may be eligible for additional benefits if you work for a not-for-profit organisation.
Not-for-profits have an FBT exemption, which means they can provide fringe benefits to their employees without paying tax on those benefits.
This exemption can significantly enhance the advantages of salary packaging for employees in the not-for-profit sector.
Key Considerations for Salary Packaging
Before deciding to engage in salary packaging, there are a few crucial points to consider:
1. Understand Your Employer’s Policy
Not all employers offer the same salary packaging options. While most employers allow salary sacrifice into super, other benefits might be limited or restricted to certain employee groups.
Check with your HR or payroll department to understand what options are available.
2. Impact on Other Benefits and Obligations
Reducing your taxable income through salary packaging may affect other financial aspects, such as government benefits, child support obligations, or HECS-HELP debt repayments.
Considering the broader financial implications and seeking advice if you’re unsure is important.
3. Professional Advice is Key
Salary packaging can be a complex financial strategy, especially when considering the impact of fringe benefits tax and the potential effects on your overall tax situation.
Consulting with a financial advisor or tax professional can help you determine the best approach tailored to your circumstances.
Conclusion
Salary packaging offers a unique way to make your income work harder by reducing your taxable earnings and giving you access to benefits.
Whether you’re sacrificing for a car, health insurance, or boosting your superannuation, the key is to understand your options and plan strategically.
By exploring how you can sacrifice part of your pre-tax income for valuable benefits, you can reduce your tax liability and potentially increase your take-home pay.
Always remember that financial decisions should be made considering your specific situation, and professional advice can help ensure that you maximise the benefits of salary packaging.
For further guidance, the ATO website provides a wealth of resources on salary packaging, fringe benefits, and superannuation contributions to help you make informed decisions.
Frequently Asked Questions
1. What is salary packaging, and how does it work?
Salary packaging, or salary sacrifice, involves receiving part of your salary as benefits (e.g., a car, health insurance) rather than cash. This reduces your taxable income, which can lower your overall tax bill.
2. What can I include in a salary packaging arrangement?
You can package items like cars, electronic devices, health insurance, childcare fees, or superannuation contributions. The specific benefits depend on your employer’s policy and what they offer.
3. Is salary packaging right for everyone?
Salary packaging is generally more beneficial for those on middle to high incomes. It’s recommended to consult a financial advisor or tax professional to understand if it suits your financial situation.
4. Does salary packaging affect my superannuation?
Yes, salary packaging can include additional contributions to your superannuation. These contributions are taxed at 15%, often lower than most individuals’ marginal tax rates.
5. Do I pay tax on salary packaging benefits?
Some benefits are subject to fringe benefits tax (FBT), which your employer pays. However, some items, like portable electronic devices and super contributions, can be exempt from FBT, depending on your employer’s arrangements.
