Salary packaging (or salary sacrifice) is where an employee makes an arrangement with their employer to give up some of their salary or wages in exchange for the employer to provide them with benefits of a similar value.
An Australian Tax Office (ATO) approved employer/employee arrangement, there is no restriction on the types of benefits that can be sacrificed but it is important that the benefits form part of your remuneration, replacing what would otherwise could have been paid as salary. There are three groups of benefits that can be provided in salary sacrifice arrangements, namely: Fringe Benefits, Exempt Benefits and superannuation.
Common fringe benefits include:
- property (including goods, real property such as land and buildings, and shares or bonds)
- expense payments (such as the payment of your loan repayments, school fees, child care costs and home phone costs).
A number of benefits are exempt from fringe benefits tax (FBT). The following work-related items commonly provided in salary sacrifice arrangements are exempt benefits:
- a portable electronic device
- an item of computer software
- an item of protective clothing
- a briefcase
- a tool of trade.
The work-related items exemption is limited to:
- items primarily for work-related use
- one item per FBT year for items that have a substantially identical function, unless the item is a replacement item.
Note: The FBT exemption for certain work-related items applies to items purchased after 7.30pm (AEST) 13 May 2008.
Salary sacrificed superannuation contributions under an effective salary sacrifice arrangement are considered to be employer contributions which, when paid for an employee to a complying superannuation fund, are not fringe benefits.
However, superannuation contributions made for the benefit of an associate, such as your spouse, are a fringe benefit. Similarly, contributions paid to a non-complying superannuation fund will be a fringe benefit.
So where is the benefit?
As salary sacrificing comes out of the employee’s pre-tax income, their taxable income is reduced by the amount of the deduction. An employee can also make post tax deductions from their salary to reduce any FBT payable too, under a novated lease arrangement this is called the ‘Employee Contribution Method’ (ECM) meaning that there can be considerable benefit to an individual who chooses to salary sacrifice. As always, individual situations vary so it is important to speak with your tax adviser before entering any salary sacrifice arrangement.