Salary sacrifice arrangements for employees

Example - salary sacrifice

The government has enacted legislation that makes changes to the statutory formula method for calculating car fringe benefits. For more information, refer to Reforms to car fringe benefit rules.

Sam, who earns $65,000 a year, is considering entering into an effective salary sacrifice arrangement. Under this arrangement, his employer will provide the use of a $35,000 car and pay all the associated running expenses of $11,500.

The salary packaging provider calculates that:

• the taxable value of the car fringe benefit will be $3,850 if the car travels between 25,000 and 40,000kms in the FBT year, and
• Sam will sacrifice
• $14,205 if no employee contributions are made, or
• $7,009 if employee contributions of $3,850 are made.

The following table illustrates how salary sacrificing and employee contributions work by comparing the net disposable income for Sam in three scenarios.

1. no salary sacrifice arrangement
2. a salary sacrifice arrangement without any employee contributions, and
3. a salary sacrifice arrangement where employee contributions are provided.

	1. Salary only (no packaging)	2. Salary + car (without employee contributions)	3. Salary + car (with employee contributions)
Annual remuneration	$65,000.00	$65,000.00	$65,000.00
Less salary sacrifice	$NIL	$14,205.00	$7,009.00
Taxable income	$65,000.00	$50,795.00	$57,991.00
Less income tax (2009-10 rates)	$13,350.00	$9,088.50	$11,247.30
Less 1.5% Medicare	$975.00	$761.92	$869.86
Income after tax/salary sacrifice amount	$50,675.00	$40,944.58	$45,873.84
Less employee contribution	NIL	NIL	$3,850.00
Less car expenses	$11,500.00	$NIL	$NIL
Net disposable income	$39,175.00	$40,944.58	$42,023.84
Reportable fringe benefits amount for employee payment summary	NIL	$ 7,196.00 (car fringe benefit taxable value of $3,850 x 1.8692)	NIL

This example illustrates how salary sacrifice arrangements can work. It is not intended to be advice, whether legal or professional. You should not act solely on the basis of the information in this example. Specific advice should always be obtained from your financial adviser.