• 1.8 Salary sacrifice

    What is a salary sacrifice arrangement?

    A salary sacrifice arrangement is an arrangement between you and your employee, where your employee agrees to forgo part of their future entitlement to salary or wages in return for you providing them with benefits of a similar value. A salary sacrifice arrangement is commonly referred to as salary packaging or total remuneration packaging.

    Under an effective arrangement:

    • the employee pays income tax on the reduced salary or wages
    • you, as the employer, may be liable to pay FBT on the fringe benefits provided
    • salary sacrificed superannuation contributions are classified as employer superannuation contributions (not employee superannuation contributions) and are taxed in the superannuation fund under tax laws dealing specifically with superannuation contributions.

    What are the requirements for an effective salary sacrifice arrangement?

    The agreement cannot cover past service

    An effective salary sacrifice arrangement is an arrangement between you and your employee specifying 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 have a written agreement including all the terms of any salary sacrifice arrangement.

    Employees can renegotiate a salary sacrifice arrangement at any time, subject to the terms of any contract of employment or industrial agreement.

    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 subject to the normal rules for salary and wages, including PAYG withholding and superannuation guarantee obligations. The amount will be assessable to the employee.

      Last modified: 04 May 2017QC 17808