What is Salary Sacrifice?
Salary sacrifice is the term we give to the portion of money that is taken from your gross salary before tax has been applied. For example, if I earn $5,000 in gross salary, and I have salary packaged a benefit which requires a salary sacrifice of $500 then the resulting tax charged on my salary is to be calculated, not on the original $5,000 gross amount, but on the difference between $5,000 and $500, being $4,500.
By salary sacrificing a portion of your earnings to pay for necessities in life you might be able to save a few dollars here and there.
What is Salary Packaging?
Salary packaging is the arrangement an employee and employer undertake to arrive at what benefits will be provided and therefore be salary sacrificed or paid for post tax.
What Can Be Salary Packaged?
Here are 19 things you probably didn’t know:
- Mortgage (for home owners) or rent payments (for renters)
- Airport lounge memberships
- Laptops or desktop computers
- Mobile phones
- iPads or other electronic devices
- Home phone
- Protective clothing
- Tools of the trade (eg. computer software)
- Childcare and/or school fees
- Utility bills
- Gym memberships
- Health insurance
- Newspapers and/or periodicals
- Credit card payments
- Road and/or bridge tolls
- Self-education expenses
- Taxi travel
Now before you go crazy and call your payroll department to put everything on your salary packaging card there are a few things to be mindful of:
Do you have a Salary Packaging Cap?
This is more than something you wear on your head. It actually depends on the type of employer you work for and if there are specific limits on how much you can salary package.
Some not for profit institutions have fringe benefit limits up to $30,000, whereas public hospitals have limits to $17,000, but these amounts can change, and it’s best to go to the source and check the latest ATO cap updates here).
What Does A Cap Mean?
If your employer has a cap this means once the grossed up value of your benefits exceed this amount then you’ll be charged the higher FBT tax rate on benefits above the cap.
Therefore, if your employer is rebatable or exempt, you might want to plan before jumping into an arrangement in case you end up paying more tax than is necessary.
Is There Really A Benefit?
The second thing you should also consider is whether there really is a benefit to salary package items.
Some of those items listed attract different Fringe Benefits Tax consequences which will be liable for your employer to pay. And your employer isn’t going to be too excited about paying tax for a benefit you receive. Therefore, they are likely to withhold an FBT provision from your salary to help cover the cost of the FBT liability.
Are Any Items FBT Exempt?
Thankfully there are several items which are FBT exempt, meaning there will be no FBT liability payable by your employer.
Items that generally fall into this category are those that would similarly have been claimed as allowable work tax deductions because they are expenses pertaining to your work (read more from the ATO here).
For an item to be FBT exempt a no-private-use declaration needs to be declared by the employer and in the form the Commissioner approves, as per section 20A of FBTAA. The ATO provides a list of forms you can use to make your declaration.
Why Not Claim It As A Tax Deduction?
The benefits of salary packaging items that are FBT exempt is that you don’t have to wait until the end of the financial year to get your tax deduction.
This can help with your cash flow, especially if you’ve just incurred the expense on the first day of the new financial year! Ugh.
Meal And Entertainment Cap
While there are employer caps depending upon the type of employer, there is one type of salary packaged provision which has a separate cap outside the employer cap. This type of benefit is the meal and entertainment cap, where you can salary package meals where you dine-in or stay in accommodation (you and spouse).
Currently, the grossed up cap on meal and entertainment is at $5,000 (source) and does not contribute to the grossed up amount of other benefits provided (unless the cap has been exceeded).
All Other Benefits
For the remaining items that cannot be classified using the otherwise deductible rule, it means they will attract the full FBT tax rate charge.
While there are some benefits which can have their taxable value reduced, such as the fully maintained operating lease when salary packaging a car owned by an associate, most other benefits attract the normal FBT liability.
This means you’ll need to calculate the viability of each benefit to see if it’s worthwhile, and your employer may already partner with the services of a salary packaging provider to help manage and assist you in packaging certain benefits.
Salary packaging is becoming a popular form of being able to eke out more of your hard-earned dollars without requiring more effort on your part.
There are many items you can salary package, but they may not be the most beneficial types to salary sacrifice. Therefore, before entering into an arrangement to salary package items check you will not be paying more in tax.