Understanding Salary Sacrificing


What is salary sacrificing?
Salary packaging – Types of salary sacrificing
How salary sacrificing can reduce your tax bill?
Salary sacrificing super
How much can I salary sacrifice into super?
How to prepare for the future with salary sacrificing?

What is Salary Sacrificing?

Salary sacrificing is a financial strategy where the employee agrees to exchange a section of their pre-tax salary for certain non-cash benefits or even contributions to their superannuation fund. Therefore, instead of the employee receiving their full salary, the employee redirects a portion of it to other benefits or investments before the income tax is implied. 

It is generally effective for people on medium to high income earners but can be used by anyone who pays tax, i.e.: if they earn over the tax-free threshold of $18,200 a year.

Rather than being subjected to your marginal tax rate, which can reach up to 47 per cent, including the Medicare Levy, these payments are typically taxed at a concessional rate of up to 15 percent.

For example, you might package a salary of $150,000 so that you receive:

  • $120,000 as income
  • $30,000 Salary Sacrifice as a car benefit 

This will have the effect of reducing your taxable income down to $120,000 and you benefit by paying less income tax.

One thing to note is that to achieve the income reduction benefits, salary sacrificing needs to be arranged on your pre-tax earnings, not your after-tax earnings. 

Types of Salary Sacrificing

One way to think about salary sacrificing is that you can package benefits that you would normally use your after-tax pay to purchase, such as super, child care, computers, laptops and even cars. 

Benefits tend to fall into one of three categories; fringe benefits, superannuation and exempt benefits.

Fringe Benefits Superannuation Exempt Benefits
Salary sacrifice for:

– A car
– Private health insurance
– Childcare fees
– Rent
– Credit card repayments
– Loan repayments
– School fees
– Other personal expenses

Your employer will pay fringe benefits tax on these benefits

Any additional contributions you make to your superannuation fund pre-tax income will be taxed at 15% which is the same percentage that your employers’ contributions are made at.

This is one of the most effective salary-sacrificing options as it boosts your retirement savings.

Your employer will not have to pay fringe benefits tax on these benefits

These can include:

– Tools of the trade
– Protective clothing
– Computer software programs
– Briefcases
– Portable electronic devices

Your employer will not have to pay fringe benefits tax on these benefits if they are primarily for work-related use.


How can salary sacrificing reduce your tax bill?

Unlocking the potential of a salary sacrifice arrangement may seem daunting at first glance, but it’s a straightforward process that involves reaching an agreement with your employer. Essentially, you agree to allocate a portion of your pre-tax salary to cover expenses like childcare, health insurance, or super contributions, which you would typically pay for after taxes. The key benefit lies in reducing the taxable income the Australian Taxation Office (ATO) uses to calculate your tax liability.

This arrangement particularly favours individuals with mid to higher incomes, as it can significantly lower their tax-assessable income. However, it’s important to note that anyone can take advantage of salary sacrifice arrangements.

How much can I salary sacrifice into super?

Salary-sacrificed super contributions constitute a portion of your concessional (or pre-tax) contributions within the financial year. The concessional contributions cap encompasses both mandatory employer contributions and is set at $25,000 annually, irrespective of your age. There are tax penalties if you go over this cap. Remember, compulsory employer contributions are included in your concessional contributions cap.

While setting up a salary sacrifice agreement can lower your taxable income, it’s essential to be aware that the benefits you receive are still reported on your annual payment summary. This reporting can impact tax offsets, child support payments, or other government benefits you may be eligible for, potentially limiting the overall value of salary sacrifice for some individuals.

How to prepare for the future with salary sacrificing?

Establishing your salary sacrifice arrangement with an employer can typically be a straightforward procedure. Once you seek approval from your employer, you’ll need to coordinate with them to allocate a portion of your pre-tax earnings directly into your selected superannuation fund. You can access these funds upon reaching your preservation age. 

The advantages of boosting your super contributions from your pre-tax income are manifold. Firstly, it facilitates easier budgeting since the funds bypass your bank account, reducing the likelihood of overlooking them. Additionally, contributed income can be taxed at a favourable capped rate of either 15 or 30 percent.

It’s worth noting that an extra 15 percent tax is levied on concessional super contributions if your combined income and concessional contributions surpass $250,000.

If you’re committed to enhancing your superannuation savings, salary sacrifice could prove beneficial. It represents a strategic approach to maximise your super contributions while simultaneously lowering your taxable income. By allocating a portion of your income today towards your future financial security, you can maintain your current lifestyle while investing in tomorrow.

To evaluate your potential savings and establish a salary sacrifice plan, reach out to your employer. Additionally, if you would like help working out if salary sacrificing is suitable for your circumstances, speak to our team of financial advisers, and call our office today.




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