A salary sacrifice arrangement (salary packaging or total remuneration packaging) is an arrangement between employer and employee — the employee agrees to forgo part of his future entitlement to salary or wages. In return, the employer provides the employee with benefits of the same value.
Salary sacrifice reduces your taxable income and the amount of tax you pay.
Seek financial advice before entering into this arrangement as it’s effectiveness depends on your financial situation.
Note: Before you start the work, set up the arrangement with your employer. It may be ineffective if it’s not put into place until after you have performed the work.
You can renegotiate a salary sacrifice arrangement. Employees can renegotiate amounts of wages or salary to be sacrificed before the start of their renewable contract — subject to the terms of any employment contract or industrial agreement.
Your employment contract may vary depending on the agreement between you and your employer. Although it can be verbal, it’s better to have an agreement in writing. It’s hard to establish the facts of your salary sacrifice arrangement if it’s undocumented.
Salary sacrifice contributions are considered to be from the employer, who’s only required to meet 9.5% super guarantee obligation.
If you choose to salary sacrifice 5% into your super, your employer would only have to contribute 4.5%. Although, if you choose 9.5% or more into your super, your employer would not be required to make any additional contributions.
The terms of the agreement should be in place to ensure your employer still pays you the 9.5% super guarantee.[Tweet “Salary Sacrifice: What Is It And How Does It Work?”]
Generally, the types of benefits provided in salary sacrifice arrangements by employers include:
- Fringe benefits — cars, property, expense payments
- Exempt benefits — a briefcase, a portable electronic device, a tool of trade, and other work-related items
- Super — salary sacrificed super contributions (taxed at 15%) are considered as employer super contributions. This reduces the superannuation to be paid by your employer when meeting their super obligations.
Be mindful of the implications of the salary sacrifice arrangement on you and your employer. This may affect the following:
- Super guarantee — your employer is required to only meet their 9.5% super guarantee obligation.
- Assessable income — less income tax liability for you
- Fringe benefits tax — your employer should pay the fringe benefits tax.
- Deductible expense — your employer will not have to pay fringe benefits tax (FBT) if they pay for an expense, which you would normally get a tax deduction for.
- Super — your earnings base may be reduced.
- Reportable fringe benefits — you will need to show this amount on your tax return.
If you’re under a salary sacrifice arrangement, your income may not suffice for now. You may find your cash won’t suffice to cover the bills.
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