• Salary sacrifice arrangements for employees

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

    Note: While we give details about how fringe benefits tax (FBT) is calculated, we do not give financial advice about accepting or rejecting a package. You should seek financial advice before entering into a salary sacrifice arrangement.

    Find out about:

    Reform of salary sacrificed 'in-house' fringe benefits

    On 22 October 2012 the government announced reforms to remove the concessional fringe benefits tax (FBT) treatment for in-house fringe benefits accessed through a salary sacrifice arrangement.

    The measure applies from:

    • 22 October 2012 for arrangements made after the announcement
    • 1 April 2014 for arrangements made before the announcement on 22 October 2012.

    The measure received royal assent on 28 June 2013.

    Requirements for an effective salary sacrifice arrangement

    You need to set up a salary sacrifice arrangement with your employer before you start the work. If your arrangement is not put into place until after you have performed the work, it may be ineffective.

    Agreement between you and your employer

    It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement. The contract is usually in writing, but may be a verbal one. If you enter into an undocumented salary sacrifice arrangement, you may have difficulty establishing the facts of your agreement.

    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, you can renegotiate amounts of salary or wages to be sacrificed before the start of each renewal.

    The contract of employment includes details of your remuneration, with any salary sacrifice arrangement. Your contract can be varied by agreement between you and your employer.

    Note: Your salary sacrificed contributions are considered to be contributions from your employer. For example, if you elect to salary sacrifice 5% into your super, your employer would only have to contribute 4.5%. Similarly, if you elect to salary sacrifice 9.5% or more into your super, your employer would not have to make any additional contributions. So you should clarify the terms of the agreement if you want to ensure your employer still pays you the 9.5% super guarantee.

    See also:

    No access to sacrificed salary

    You must permanently forego the sacrificed salary for the period of your arrangement. 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.

    Similarly, if you direct your employer to make payments to a third party from salary you have earned (for example, to pay your health insurance premiums, loan repayments, union fees or credit card repayments), these do not constitute an effective salary sacrifice arrangement. These third-party payments are made from your after-tax or net amounts of salary.

    Note: Any salary and wages, leave entitlements, bonuses or commissions that accrued before you entered into the arrangement cannot be part of an effective salary sacrifice arrangement.

    Types of benefits that can be included

    There is no restriction on the types of benefits you can sacrifice. The important thing is that these benefits form part of your remuneration. They replace what otherwise could have been paid as salary.

    The types of benefits generally provided in salary sacrifice arrangements by employers include: fringe benefits, exempt benefits, and super.

    Fringe benefits

    Common fringe benefits include:

    • cars
    • property (including goods, real property such as land and buildings, and shares or bonds)
    • expense payments (such as the payment of your loan repayments, school fees, child care costs and home phone costs).

    Exempt benefits

    A number of benefits are exempt from fringe benefits tax (FBT).

    The following work-related items commonly provided in salary sacrifice arrangements are exempt benefits:

    • a portable electronic device
    • an item of computer software
    • an item of protective clothing
    • a briefcase
    • a tool of trade.

    The work-related items exemption is limited to:

    • items primarily for work-related use
    • one item per FBT year for items that have a substantially identical function, unless the item is a replacement item.

    Note: The FBT exemption for certain work-related items applies to items purchased after 7.30pm (AEST) 13 May 2008.

    For more information about work-related items purchased at or before 7.30pm (AEST) on 13 May 2008, refer to Reportable fringe benefits.

    Super

    Salary sacrificed super contributions under an effective salary sacrifice arrangement are considered to be employer contributions. These are not fringe benefits when paid for an employee to a complying super fund.

    However, super contributions made for the benefit of an associate, such as your spouse, are a fringe benefit. Similarly, contributions paid to a non-complying super fund will be a fringe benefit.

    Implications of entering into an arrangement

    As an employee, you need to be aware of how entering into a salary sacrifice arrangement with your employer will affect you. This may affect your employer because:

    • You pay income tax on the reduced salary or wages.
    • Your employer may be liable to pay FBT on the non-cash benefits provided.
    • Your employer may be required to report certain benefits on your payment summary.
    • Salary sacrificed superannuation contributions are taxed in the superannuation fund under tax laws dealing specifically with this subject.
    • Salary sacrificed super contributions are classified as employer super contributions, rather than employee contributions. This will reduce the level of superannuation to be paid by your employer when meeting their superannuation obligations. For example, if the salary-sacrificed super contribution is more than the minimum super guarantee amount of 9.5%, your employer does not need to pay an additional amount to their super guarantee obligations to you. If you wish your employer to contribute the minimum super guarantee amount as well your elected the salary sacrificed contribution, you will need to have an agreement between you and your employer specifying that they continue to pay the minimum super guarantee amount. It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement.

    See also:

    Super guarantee

    Your salary-sacrifice contribution is counted towards your employer contributions. Your employer is only required to meet their 9.5% super guarantee obligation. This can mean for example, that if you elect to salary sacrifice 5% into your super, your employer would only have to contribute 4.5% into your super.

    To continue to receive the minimum super guarantee amount from your employer, you will need to have an agreement in place. This must specify that your employer continues to pay the minimum 9.5% super guarantee amount, without including your extra contributions.

    Salary sacrificed super contributions are taxed in the super fund under tax laws dealing specifically with this subject. It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement.

    See also:

    Assessable income

    You only pay income tax on your reduced salary, but you receive the reduced salary plus the benefits. You can make employee contributions out of your after-tax income. These can be towards the cost of the benefits and reduce any reportable fringe benefits amount.

    Under an effective arrangement, your income tax liability should be less than it would have been without an arrangement. However, before entering into a salary sacrifice arrangement you should consider the associated costs. This includes the amount to be sacrificed and any surcharges or obligations from having the benefits reported on your payment summary.

    Salary sacrificing a deductible expense

    If your employer pays for an expense, as part of your salary package, which you would normally get a tax deduction for, they will not have to pay FBT on this expense. This is known as the ‘otherwise deductible rule’. If this occurs you will not be able to claim an income tax deduction for this expense in your personal income tax return. This is because the ‘deductible element’ of the expense has been taken into account when your employer calculates the taxable value of the benefit provided to you for FBT purposes.

    Example: Employer-paid expense

    An employer pays for the compulsory insurance of a ‘Death and disability scheme’ for their employees. Premiums are set at 1.8% of the income package and are paid under a salary sacrifice arrangement.

    Income tax deductions cannot be claimed where an expense has been paid by an employer.

    End of example

    Fringe benefits tax

    If there is any FBT payable on the benefits you received, your employer is liable to pay that tax. Your salary may be reduced by the amount of FBT paid by your employer as part of your salary sacrifice agreement.

    Certain employers, such as public benevolent institutions, health promotion charities and public hospitals, will not be liable to pay FBT. That is unless the amount of benefits provided to an individual employee exceeds the relevant threshold.

    Super

    Where contributions are paid to a complying super fund, your earnings base may be reduced. That is unless the salary sacrifice arrangement states otherwise. Your earnings base is the amount on which super contributions made by your employer are calculated.

    Reportable fringe benefits

    If the total taxable value of certain fringe benefits received by you in an FBT year (1 April to 31 March) exceeds $2,000, the grossed-up taxable value of those benefits will be recorded on your payment summary for the corresponding income year (1 July to 30 June). Some fringe benefits, called excluded benefits, don’t have to be reported on your payment summary, although your employer still has to pay FBT on these benefits.

    Grossing up reflects the gross salary that you would have to earn to purchase the benefit from after-tax dollars. This is calculated at the highest marginal tax rate, including the Medicare levy. That is, your employer multiplies the taxable value of the benefit by 1.9608.

    The value of fringe benefits reported on your payment summary is known as your reportable fringe benefits amount. You will need to show this amount (or the total of the reportable fringe benefits amounts if you receive more than one payment summary during the year) on your tax return.

    This amount is shown on your tax return, but will not be included in your assessable (or taxable) income or affect the amount of basic Medicare levy payable. However, the total will be used to calculate:

    • the Medicare levy surcharge
    • deductions for personal super contributions
    • the super co-contribution
    • certain tax offsets
    • the private health insurance rebate
    • Higher Education Loan Program (HELP) and Student Financial Supplement Scheme (SFSS) repayments
    • your child support obligations
    • your entitlement to certain income-tested government benefits.

    Example: Salary sacrifice of a motor vehicle

    Sam earns $65,000 a year and 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 $5,950 if the car travels between 25,000 and 40,000 kms in the FBT year
    • Sam will sacrifice either 
      • $14,205 if no employee contributions are made
      • $9,109 if employee contributions of $5,950 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
    3. a salary sacrifice arrangement where employee contributions are provided.
    Three salary sacrifice scenarios

     

    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

    $9,109.00

    Taxable income

    $65,000.00

    $50,795.00

    $55,891.00

    Less income tax (2015–16 rates)

    $12,672.00

    $8,055.38

    $9,711.58

    Less 2% Medicare

    $1300.00

    $1015.90

    $1117.82

    Income after tax and salary sacrifice amount

    $51,028.00

    $41,723.72

    $45,061.60

    Less employee contribution

    NIL

    NIL

    $5,950.00

    Less car expenses

    $11,500.00

    $NIL

    $NIL

    Net disposable income

    $39,528.00

    $41,723.72

    $39,111.60

    Reportable fringe benefits amount for employee payment summary

    NIL

    $11,666.76

    (car fringe benefit taxable value of $5,950 × 1.9608)

    NIL

     

    End of example

    Note: The above 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.

    See also:

    If you need more information you can:

    • phone 13 28 66
    • speak to your adviser.
      Last modified: 19 May 2017QC 16650