What are the requirements for an effective salary sacrifice arrangement?

It must be an arrangement before services

An effective salary sacrifice arrangement is an arrangement between an employer and an employee detailing the amount of salary or wages income to be sacrificed. The arrangement should be entered into before the work is performed. If the arrangement is put into place after the work has been performed, the salary sacrifice arrangement may be ineffective.

It is advisable that you and your employees clearly state and agree on all the terms of any salary sacrifice arrangement. Employees who enter into an undocumented salary sacrifice arrangement may encounter difficulty establishing facts at a later date.

Subject to the terms of any contract of employment or industrial agreement, employees can renegotiate a salary sacrifice arrangement at any time. Where you have a renewable contract with an employee, the employee can renegotiate amounts of salary or wages to be sacrificed before the start of each renewal.

There should be an agreement between the employer and employee

The relationship between you and an employee starts when you enter into a contract of employment with each other before personal services are performed. The contract is usually in writing, but may be a verbal one.

The contract of employment includes details of an employee's remuneration, including any salary sacrifice arrangement. This contract can be varied by agreement between you and the employee.

There should be no access to the sacrificed salary

The employee should not have any access to the salary being sacrificed for the period of the arrangement. Any benefit entitlements that are provided by way of cash payments of benefits may form part of normal salary and wages. This includes deposits you make to an employee's bank savings account.

If a fringe benefit has not been provided and is cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is salary and is taxed as normal income.

    Last modified: 18 Jan 2012QC 17808