Salary sacrifice is still one of the best ways to pump money into concessional saving schemes and benefit from the tax deductions. Simply put, a salary sacrifice is an arrangement that you go into with your employer that enables you to pay for some items from your pre-tax salary.
The impact of a salary sacrifice arrangement is that it reduces your taxable income and the tax bill while at the same time giving you tax-friendly access to certain services such as superannuation and even certain goods.
With an effective salary sacrifice, it is possible to take some of your regular remuneration in the form of a concessional tax benefit instead of taking the whole salary as your full assessable income. The name salary sacrifice comes from the fact that the employee is sacrificing a small part of their salary in order to take advantage of some desired benefits such as tax effective saving schemes.
Salary Sacrifice and Superannuation
A salary sacrifice is one of the best ways to ramp up your contributions to your superannuation while maximizing on the attractive tax benefits. Through a salary sacrifice, you can reduce your take home pay (and subsequently, your income taxes) while putting the money that you have saved into your superannuation.
The tax benefits come by way of you paying only the concessional tax rate of 15% on your super contributions instead of paying full taxes at your marginal tax rate. Over time, and factoring in the effect of compounding, this can amount to significant savings.
How Do You Salary Sacrifice?
The salary sacrifice process begins with a simple agreement with your employer. It is generally an attractive option for many employers so they are likely to be amenable to the idea. However, in many cases, there may be administrative costs that are associated with the salary sacrificing so it is important to be aware of this if going for this option.
The salary sacrifice arrangement should be made before the work commences as the agreement may be rendered ineffective if it is established after you have started work. For the sake of prudence, the agreement should also be put in writing with specific terms on what you will be sacrificing under the arrangement.
Once the agreement in place, you will permanently forego the sacrificed component of the salary for the duration that the agreement will be in place.
What You Can Salary Sacrifice
You have a lot of leeway on what to salary sacrifice. There are three main types of benefits that you can salary sacrifice. These include the following:-
- Fringe benefits
- Super
- Exempt Benefits
Fringe Benefits
There are various kinds of fringe benefits that can be offered by your employer such as loans, company car, school and childcare fees, as well as various other personal expenses. While the value of the fringe benefits received will appear in your payment summary during tax time, you won’t have to pay any tax on these. Non-reportable fringe benefits such as car parking will not even appear on the payment summary at the end of the year.
Exempt Benefits
There are various fringe benefits that are exempt from the fringe benefit tax (FBT). These are mostly work-related items or benefits that can be included under a salary sacrifice arrangement. Examples of these include the following:-
- Portable electronic devices
- Computer software
- Tools of trade
The exempt benefits only apply to the items provided by the employer that are used primarily for work-related activities. You should also make note of the one item rule for the fringe benefits that have substantially identical functions. This applies unless an item is a replacement.
Salary Sacrificing on a Car
Salary sacrificing on a car is one the best ways to purchase a new work-related car while minimizing your tax burdens. The amount of money that will be used in footing the cost of the lease back will be coming from your pre-taxed salary thereby minimizing your taxable income and tax bill. If you contribute to the operational costs of the vehicle, you will also help in reducing the Fringe Benefits Tax that is paid on the work-related car purchase.
Salary Sacrificing on Super
This is a novel way to use a salary sacrifice. In this case, you will ask your employer to direct a portion of your pre-tax salary into a super thereby enjoying a concessional tax rate of 15% while reducing your taxable income and taxes due. This can be advantageous for high grossing workers who have to grapple with a higher marginal tax rate.
Take Note of the Concessional Contribution Cap
Keep in mind that there is a cap or limit on how much you can contribute to your superannuation via the salary sacrifice route. In the 2017/2018 tax year, the contribution cap is $25,000. When making contributions through the salary sacrifice route, it is also important to keep an eye on all the concessional contributions going into your superannuation such as the Super Guarantee (SG) and any pre-tax contributions that you make on top of the Super Guarantee.
Exceeding the Concessional Contribution Limits
If you exceed the concessional contributions limit, the excess concessional contributions will be added to your assessable income for the following year and taxed at the marginal tax rate. Additionally, you will be liable for the excess concessional contributions charge (ECC). That will defeat the whole purpose of using a super to maximize on your tax concessions.
Seek Professional Advice
Before you rush into the salary sacrifice route, it is always advisable to seek professional advice from your financial planner or an accountant to help you crunch the numbers and run through your options for the most suitable path.
