Salary sacrifice is rising in popularity in Australia as workers use this scheme to access more of their wages and pay less in tax – legally.
Salary sacrifice or salary packaging payroll solutions, approved by the Australian Taxation Office (ATO), lowers your taxable income and increases your take-home pay. With approval, anyone employed can apply for a salary package and potentially save thousands every year.
Under this arrangement, the employee has the option of taking some of their pay in some other form of benefit before income tax is applied. This means they pay less tax than they would be liable for under a standard gross income.
Salaries can be sacrificed for various things, including superannuation, electronics (such as laptops), parking arrangements, living away from home allowances and car benefits like a Novated Lease. What the money is used for needs to be decided between the staff member and the employer.
For example, you can use salary sacrifice to pay a novated lease on a car. The car payments are taken out separately from your gross income before tax is applied, reducing your tax exposure.
Does An Employer Have To Pay Extra Tax?
They can access three types of employee benefits with salary packaging: fringe benefits, exempt benefits, and superannuation.
Fringe benefits can include car loans, health insurance, school fees, childcare fees and other personal expenses like rental payments and even groceries. The employer will be required to pay fringe benefits tax (FBT) on these benefits.
An employer does not have to pay this FBT for work-related expenses which fall under the exempt benefits category, including computers, smartphones, software, protective clothing, tools and more.
What Should An Employer Do If An Employee Requests Salary Sacrifice?
There are three steps you must take to set up an effective salary sacrifice arrangement for any workers that request it:
- Establish a plan for future salaries for employees: Your staff member may know precisely how much salary they want to sacrifice and what they want to use it for, or they may have a general idea but nothing specific. You will need to work together to establish exactly how much will be allocated and for what purpose.
- Document the agreement: To avoid any confusion or future disputes, a written agreement will need to be drafted stating all the terms and conditions of the salary sacrifice arrangement.
- Ensuring the fund is compliant: You may be liable for Fringe Benefits Tax (FBT) if the fund chosen by your employee is not compliant. Contributions to complying superannuation funds made as salary sacrifices are not considered fringe benefits.
Modern payroll solutions have salary sacrifice functionality built into them, so you can follow their directions to set up the payments and be compliant with the ATO. Alternatively, you can consult a payroll expert or accountancy service to set this up for you.
The ATO has also laid out specific guidelines on setting up salary sacrifice arrangements to ensure the agreements you establish are compliant.
What Happens When An Employer Rejects a Salary Sacrifice Request?
Providing the employer pays the compulsory 10 per cent concessional super contributions (which will gradually increase up to 12 per cent by 1 July 2025) on behalf of their employees, they are under no obligation to approve salary sacrifice requests.
Flatly refusing salary sacrifice is not a great strategy as it can lead to employee dissatisfaction, and you may have difficulty holding onto your best talent. However, if the workforce makes constant changes to their salary packages or multiple requests, it can lead to extra work for payroll.
To reduce this workload, many employers may limit employees to one salary sacrifice negotiation per year.
Interested in learning more about salary sacrificing? Check out our master guide here!
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