Want to cut down your tax bill legally? Salary sacrifice could be your answer. Many Australians use this smart money strategy to keep more cash and build wealth at the same time.
People often ask us how salary sacrifice works and if it makes sense for them. The concept is straightforward – you get part of your pay as benefits instead of cash. This approach can lead to big tax savings when you do it right.
Let us walk you through the basics of salary sacrifice. You’ll discover how it works, what benefits you can pick from, and the right way to set it up to get the best tax advantages.
What is Salary Sacrifice and How Does it Work?
People often use different terms like salary packaging, salary exchange, or remuneration packaging – they all mean the same thing.
Here’s a clear explanation of salary sacrifice and how you can benefit from it.
Definition and simple concepts
Salary sacrifice creates a formal arrangement between you and your employer. You agree to receive less pre-tax income in exchange for specific benefits of similar value.
This restructures your pay package and could lower your taxable income while keeping your total compensation the same.
The concept works in a straightforward way – you receive your income and benefits in the most tax-friendly way possible. Your participation in salary sacrifice lets you “package” your income for the best tax outcome.
Types of salary sacrifice arrangements
Salary sacrifice benefits fall into three main categories:
- Superannuation contributions: Taxed at just 15% in your super fund
- Fringe benefits: Including cars, health insurance, school fees, and childcare costs
- Exempt benefits: Such as work-related items like protective clothing and computer software
Legal requirements and considerations
Your salary sacrifice arrangement needs these key requirements to stay compliant:
- Enter the arrangement before performing the work
- Have a formal agreement with your employer (written is preferred)
- Permanently forgo access to the sacrificed salary during the arrangement period
Salary sacrifice arrangements affect several parts of your financial situation, including Medicare levy surcharge, study loan repayments, and government benefits.
The concessional contributions cap stands at AUD 42,337.08 for 2024. Going over this amount can lead to extra tax obligations.
Our tax planning team can help you create an optimal salary sacrifice arrangement that stays tax-compliant. We’ll guide you through salary packaging complexities and maximize your tax benefits. Reach out today to learn how we can reduce your taxable income while meeting all ATO requirements.
Common Salary Sacrifice Benefits Explained
Here are the most popular salary sacrifice benefits that can help you save more on taxes. You’ll learn how each option works and why they could fit into your financial strategy.
Superannuation contributions
Superannuation stands out as the most beneficial choice for tax-effective salary sacrificing.
Your sacrificed super contributions face a tax rate of just 15% in the fund, which is much lower than most marginal tax rates.
Someone on a 30% marginal rate saves 15% tax on every dollar they put into super.
The concessional contributions cap is set at AUD 42,337.08 for 2024 and will rise to AUD 46,185.91 for 2025.
Just so you know, these contributions don’t affect your employer’s super guarantee obligations, which makes them even more attractive.
Vehicle and transportation benefits
Vehicle benefits through novated leasing have become a client favorite. You can pay for your car and running costs straight from your pre-tax salary. This covers:
- Vehicle lease payments
- Fuel costs through a pre-loaded card
- Registration and insurance
- Regular servicing and maintenance
Electric or plug-in hybrid vehicles offer extra benefits since they’re completely exempt from fringe benefits tax (FBT). This means more savings in your pocket.
Technology and work-related items
Work-related technology items are a great way to reduce your taxable income. These items don’t attract FBT when used mainly for work:
- Portable electronic devices
- Computer software
- Protective clothing
- Tools of trade
Employees at small businesses with turnover under AUD 15.40 million can salary sacrifice multiple electronic devices per FBT year. This benefits both employers and employees.
Our tax planning team can help you structure your salary sacrifice arrangement to save more tax while meeting ATO requirements. Get in touch today to find out how we can help lower your taxable income.
Step-by-Step Guide to Setting Up Salary Sacrifice
Want to set up your salary sacrifice arrangement?
Here’s a practical guide to help you get started and make the most of your benefits while meeting ATO requirements.
Discussing options with your employer
Start by talking to your employer about salary packaging – the best time to have this conversation is during performance reviews or salary negotiations.
Research your options beforehand and prepare a clear pitch that shows how salary packaging benefits everyone involved.
Calculating potential tax savings
Salary sacrificing lowers your taxable income. Your buying power improves by 32.5% on sacrificed amounts if you’re in the 32.5% tax bracket.
Superannuation contributions get taxed at only 15% in the fund, which means substantial savings for people in higher tax brackets.
Documentation and agreement requirements
Your arrangement needs these essential documents:
- A formal written agreement between you and your employer
- Documentation of the specific terms and conditions
- Clear records of all expenses and arrangements (kept for 5 years)
Important: You must set up the arrangement before starting the work, and the sacrificed salary remains untouchable during the arrangement period. Your employer needs proper documentation and records for tax purposes.
Setting up salary sacrifice might seem complicated at first. Nevertheless, our tax planning team can help structure your arrangement to give you the best benefits while staying compliant. Get in touch with us today to see how we can help lower your taxable income.
Avoiding Common Salary Sacrifice Mistakes
Small mistakes in salary sacrifice arrangements can lead to major tax consequences. Let’s look at the most common pitfalls and ways to stay clear of them.
Timing and documentation errors
A basic rule stands out above all others: your salary sacrifice arrangement must be 2 years old before you earn the income.
Many employees make the mistake of trying to sacrifice income they’ve already earned. This approach never works.
Here’s what you need to do to stay compliant:
- Enter the arrangement before performing the work
- Have a formal agreement with your employer
- Make sure you cannot access the sacrificed salary
Understanding FBT implications
Fringe Benefits Tax (FBT) can affect your salary sacrifice arrangement’s effectiveness substantially.
Your employer pays FBT at a rate of 47% on the grossed-up value of benefits provided. The good news is that some benefits like work-related items don’t attract FBT.
Your employer might ask you to make employee contributions to reduce their FBT obligations. This becomes especially important with benefits like cars or entertainment allowances.
Contribution caps and limits
Staying within contribution caps is a vital part of superannuation salary sacrifice. The current concessional contributions cap sits at AUD 46,185.91 from July 2024.
Going over this limit means:
- Additional tax obligations
- Excess contributions become part of your assessable income
- A 15% tax offset accounts for contributions tax already paid
You can withdraw up to 85% of your excess concessional contributions to pay your income tax liability if you exceed the cap.
Our tax planning team knows how to optimize your salary sacrifice arrangements while maintaining full compliance. Give us a call today to find out how we can help lower your taxable income effectively and keep you away from these common mistakes.
How to Make the Most Out of Salary Sacrificing
Your success with salary sacrifice relies on good planning and proper documentation. The tax savings are most important to people in higher tax brackets. Note that you’ll need to watch your timing, monitor contribution caps, and think about FBT implications.
Many Australians leave substantial tax savings on the table because these arrangements seem too complex.
However, our tax planning team knows how to create salary sacrifice strategies that fit your specific situation.
We’ll help lower your taxable income and make sure you stay compliant with ATO requirements. Get in touch with us today and let us help you optimize your salary package.
