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Salary sacrifice is an arrangement where an employee agrees to forego some of the wages that will be owed to them in the future, in exchange for something else of similar value. There are a number of ways people choose to do this and it is becoming increasingly popular amongst employers and employees.
You can sacrifice your salary or wages into a variety of benefits including:
- Car fringe benefits
- Expense payment fringe benefits, such as
- school fees
- child care costs
- loan repayments.
There are strict rules surrounding salary sacrifice and these should be discussed with your financial adviser and your employer before committing to such an arrangement.
Things to be aware of:
- Fringe benefit taxes may apply to items paid for using salary sacrifice.
- The usual 9.25 percent rate from 1/7/13 (or higher) your employer contributes may be reduced when reducing taxable income through salary packaging.
- Salary sacrifice contributions will be taxed at 15 percent within your super fund, and maybe even at 16.5 per cent on withdrawal, depending upon when and how it is accessed.
Salary sacrificing into Superannuation
One way to salary sacrifice is into your superannuation fund. Contributions made through a salary sacrifice arrangement are fringe benefit tax (FBT) exempt. You pay the contributions in pre-tax dollars, meaning they don’t get taxed as income before they’re paid to the fund.
Your employer can make additional super contributions when you arrange for some of your pre tax salary to be paid into your superannuation fund. The concessional contributions cap for the 2014/2015 year is $30,000 for individuals under the age of 50 and $35,000 for individuals aged 49 years or over.
As superannuation contributions are not subject to FBT and are not reportable benefits it makes them attractive to salary package. The amount that is salary sacrificed is taxed in the superannuation fund at 15%. An employee on 30% marginal rate will save 15% tax on every dollar that is salary sacrificed into super. The employee on higher marginal tax rates will have higher savings.
WHAT IS THE BENEFIT?
The advantages of salary sacrifice are that you are buying the benefit in pre tax dollars. That is, if your tax rate is 32.5%, you get 32.5% better buying power.
Example: If a salary sacrifice arrangement was entered into for a car. The annual cost of a car is $10,000 and your salary is $80,000 the savings would be:
Without salary sacrifice with salary sacrifice
|Salary||$80,000||Salary (net of salary sacrifice)||$70,000|
|Less: Tax & MedicareCar Expenses Disposable income left||$18,747*$10,000||$28,747$51,253||Less: Tax & Medicare Disposable income left||$15,347* $54,653|
*tax rates are 2013/2014 (and assume no liability for Medicare Levy Surcharge)
- The above calculations have not taken into account Fringe Benefits Tax (FBT) as this depends on a few factors:
- Does your employer pay the FBT?
- Do you reimburse your employer for the private use?
- The private use of the car does effect the FBT payable.
- The amount of travel the car does effects any FBT tax payable.
- Some benevolent institutions do not pay FBT.
- FBT is payable by the employer not the employee.
- Many salary package deals require the employee to reimburse the employer for the FBT costs out of the salary package.
- Motor cars are subjected to FBT but have concessional rates according to the private use.
- Expenses such as school fees, personal expenses and mortgage payments attract fringe benefit tax, which is based on the top marginal rate of tax.
What is a Novated lease
In Australia, a novated lease is generally a three way agreement (“novation agreement”) between an employer, employee and lease company, under which the employee leases a vehicle from the lease company, and the employer agrees to take on the employee’s obligations under the lease. Both the running costs and the finance payments can be sacrificed, up to a certain limit
Normally, the employer then makes the lease payments on behalf of the employee, and deducts them out of the employee’s pre-tax income (known as salary packaging a vehicle)
Benefits for the employee:
- Potential for significant income tax savings.
- Savings on GST that would normally be incurred on vehicle expenses.
- Potential access to volume discounts if the employer has many vehicles under this scheme.
- More flexibility in the choice of a car compared to a company car arrangement.
- Vehicle stays with the employee and can be transferred to a new employer.
Benefits for the employer:
- A way to provide an effective increase in employees’ salaries with no or minimal cost to the business.
- Potentially a cost effective alternative to operating a fleet of company vehicles.
- Compared to company cars, the business does not assume any risk for the vehicles.
- Compared to company cars, employee vehicles are “off balance sheet”.
Benefits for the service providers:
- They provide various services for fees and/or commission.
Always speak to your Hudson adviser before going into a salary sacrificing arrangement and keep in contact with them regularly to ensure that you aren’t breaching the cap. Salary sacrifice is beneficial in certain circumstances.