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  • Requirements for an effective salary sacrifice arrangement

    Arrangement in place before work starts

    A salary sacrifice arrangement needs to be in place before the work starts. If the arrangement isn't put in place until after the work has been performed, it may be ineffective, in which case the benefits are taxed as assessable (or taxable) income of the employee at the time they are provided.

    It is advisable that:

    • the employer and employee clearly understand and agree on all the terms of a salary sacrifice arrangement
    • the arrangement be documented in a written agreement to avoid uncertainty and disputes.

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

    A contract of employment includes details of remuneration, including any salary sacrifice arrangement. The contract can be varied by agreement between the employer and employee.

    See also:

    No access to sacrificed salary

    The employee must permanently forgo the sacrificed salary for the period of the arrangement. If a fringe benefit hasn't 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.

    Similarly, if the employee directs the employer to make payments to a third party from salary that has already been earned (for example, to pay health insurance premiums, loan repayments, union fees or credit card repayments), these do not constitute an effective salary sacrifice arrangement. The third-party payments are made from after-tax or net amounts of salary.

    Note: Any salary and wages, leave entitlements, bonuses or commissions that accrued before entering into an arrangement can't be part of an effective salary sacrifice arrangement.

    Last modified: 29 Mar 2019QC 58424