What Is Salary Sacrifice?
The Trending New Employee Benefit
Budget cutbacks and earnings losses dominated the headlines in 2022, presenting businesses with unexpected challenges.
The Australian Bureau of Statistics reported that nearly half (46%) of all businesses experienced increased operating expenses last year and remained steady after reaching their peak last January 2022. As businesses search for solutions to expensive incentive plans, the consequence will pave the way for less costly solutions such as salary sacrifice.
When you hear the word “sacrifice,” you probably think of giving something up. Salary sacrifice, though, could have advantages.
Salary sacrifice, though, could have advantages.
Additionally, salary sacrifice arrangements are seen to gain traction in the coming years since they are often cost-neutral.
This simple guide on salary sacrifice in Australia can help you determine whether it’s something you should look into more.
See what’s included in our expertly-vetted salary sacrifice manual:
What Is Salary Sacrifice?
A salary sacrifice, also known as total remuneration or salary packaging, is an agreement authorised by the Australian Taxation Office. It is an agreement between an employee and an employer wherein the employer consent to receiving benefits from your company in exchange for a decrease in their take-home pay. Benefits might come in tangible items like laptops or cars or as voluntary donations to your superannuation account. Your pre-tax income is used to pay for these benefits.
How Does Salary Sacrifice Work?
Salary sacrifice is an exciting financing approach, but it can sound complicated on the surface.
For years, Askfunding has helped Australians understand salary sacrifice, so we’ll make things more straightforward for you.
When an employer and employee enter into a salary sacrifice agreement, they give up a portion of their future entitlements (like salary or earnings) in exchange for incentives of comparable financial worth.
Naturally, you do not just agree to give up this cash. Alternatively, it is utilised to “buy” something valuable to you from your company.
Additionally, your take-home income may increase as you pay a lower tax rate and social security.
What Can You Salary Sacrifice?
What you may salary sacrifice depends on your company. Typical perks include advances to your superannuation and payments for products like computers, phones, and cars (often via a novated lease), generally in return for a pre-determined percentage of your pre-tax earnings or wages. According to the ATO, there are no limitations on the benefits you may get from a salary sacrifice agreement.
Listed below are the three most common kinds of advantages:
- Fringe benefits
Fringe benefits include things like;
- property (including goods, real property like land and buildings, shares or bonds)
- expense payments (loan repayments, school fees, childcare costs, home phone costs)
Depending on your job, your employer usually is responsible for paying fringe benefits tax (FBT).
- Exempt Benefits
Exempt benefits cover;
- portable electronic devices for work,
- computer software,
- protective gear,
- and trade equipment.
If you use them mainly for work-related purposes, your company won’t be responsible for paying FBT on them.
Another option is to request that your company contribute a portion of your pre-tax income to your superannuation account. This is in addition to your company’s payments on your behalf under the Superannuation Guarantee, which should be not less than 9.5% of your gross yearly income (before taxes).
Rather than being reported as employee contributions, salary sacrificed payments to a super contribution are recorded as employer contributions. These payments are known as concessional contributions and are taxed at 15%. This will be less than their marginal income tax rate for many employees.
Speaking of taxes, did you know that you can save on paying taxes through a salary sacrifice?
What Are The Tax Benefits Of Salary Sacrifice?
When you avail of a salary sacrifice, you may be eligible to pay for various charges out of your pre-tax income, depending on your industry and sector of employment. You could pay less tax as a result and have more money available.
See what you could save.
In 2021, the most recent year for which the OECD has complete statistics, Australia ranked second among OECD members on personal income tax as a share of total taxes. Salary sacrifice lowers your taxable income, which results in lower tax payments.
In other words, taxes are only taken at a rate of 15% from your salary sacrifice amount, as opposed to the 47% tax rate you pay on your income. Also, the tax rate on the investment growth that your superannuation receives is similarly capped at 15%. Compared to investing taxes outside of superannuation, this might be much cheaper.
Did you get the numbers mixed up? Here are some hypothetical scenarios to help you understand
Example No. 1
If your annual income totalled $80,000 before taxes, you might decide to take home $70,000, and salary sacrifices the other $10,000 into your superannuation. According to the Australian Taxation Office (ATO), you will only be taxed on your reduced salary or earnings. In this instance, the deducted amount would lower your taxable income to $70,000.
Example No. 2
Assume you earn $100,000 per year and want to purchase a new car for work that costs $22,000. If you opted into a salary sacrifice arrangement with your employer, the $22,000 for your car would be deducted from your taxable income. So, with an income of $78,000 and a tax-free car, you wind up in the lower tax bracket.
It sounds like a real deal, right? The next big question you might have in mind would be—” How much can I salary sacrifice?”
How Much Can I Salary Sacrifice?
The first step to determining how much you can salary sacrifice is to contact your company’s payroll department. Inquire if you can make a salary sacrifice and understand how much, how frequently, and when can you do so.
It’s worth noting that the maximum salary sacrifice allowed for employees of not-for-profit organisations is $15,900, sometimes referred to as your “tax-free ceiling,” and for those working in hospitals and the healthcare industry, it is $9,010. Utilising the full amount of your salary packaging allocation is referred to as salary packaging to the “cap.”
Be cautious not to go above the allowable amount. You may be subject to extra tax and penalties if you exceed the cap.
Still, everyone is unique, so if you’re considering putting up a salary sacrifice agreement, think about your situation and if it’s the best course of action for you.
Will Salary Sacrifice Work For Me?
Salary sacrifice often works best for middle- to high-income employees, whereas those already in a low tax band might expect to save little to no taxes.
However, Askfunding notes that salary sacrificing may often be tax-effective if you make more than $37,000 annually. You could be qualified for the low-income superannuation tax offset (LISTO), which can save you up to $500 annually if your earnings are $37,000 or less.
Are you thinking about setting up a salary sacrifice agreement with your employer?
Consider the following pros and cons of salary sacrificing to help you decide.
The Pros And Cons Of Salary Sacrificing
The advantages and disadvantages of salary sacrificing depend on your financial circumstances. Here are a few of the possible benefits;
Pros Of Salary Sacrificing
- You can boost your retirement funds
If you avail of a salary sacrifice towards your super—reduce your take-home pay while contributing more to your super— you’ll have more money for retirement.
Australian Employers must generally provide a minimum 10.5% super contribution to your account. However, it’s probable that if you depend entirely on it, you won’t have enough money to support your living standard in retirement.
Increasing your super savings contributions today can grow your nest egg over time. Compound interest, or additional interest of interest, will be earned while the investment is in your fund and your wealth increases in proportion to the rise in your account balance.
- You could pay less in taxes
As a general rule, you may pay a lower tax rate on the percentage of salary sacrificed.
The amount you give up is deducted from your pre-tax income and is recognised as an employer contribution. Employer contributions are subject to a 15 % concessional (discounted) tax rate, likely a lower rate than what would be applied to contributions subject to the marginal tax rate.
As a consequence of earning less take-home pay (with more of your salary going into super), your taxable income will be decreased, which generally means you will pay less income tax.
- You can benefit from the First Home Super Saver Program
The First Home Super Saver Scheme (FHSS) provides access to up to a maximum of $50,000 ($100,000 for couples) by contributing to their super of $15,000 every financial year to help you save for the purchase or construction of your first home, provided you are qualified. The FHSS benefits only apply to voluntary contributions, such as salary sacrifice and after-tax individual contributions.
Generally, to participate in the program, you must be:
- purchasing or constructing a first home;
- being at least 18 years old (although you may start contributing when you’re younger);
- and intending to occupy the property for at least six months within a year of being allowed to move in (within the first 12 months you own it).
Visit the ATO website for the complete qualifying requirements and learn more about the FHSS programme.
- Encourage employee engagement and well-being
Many benefits employers may provide to workers via salary sacrifice can be a vital pillar of support, especially for those who have children and might benefit significantly from daycare vouchers.
Many studies have been done on the effects of non-financial incentives (rewards other than a pay raise or bonus), and many have discovered that non-financial recognition might be the most successful. Additionally, studies have shown that younger workers value benefits, especially those that support a healthy work-life balance.
Offering these incentives may increase engagement and retention among staff members by demonstrating the importance you place on them. These agreements, which are often long-term, demonstrate your willingness to invest in the futures of your workers as well.
Cons Of Salary Sacrifice
Despite the many benefits salary sacrifice provide for employee and employers, there are a few drawbacks worth looking into.
- A reduced salary might not cover expenses
Part-time employees or low-wage earners won’t probably benefit from salary sacrifice since they will take home less money, which may not be enough to pay living costs. Less money coming in might lead to a shortage of funds covering expenses like food, rent, and entertainment.
- Additional administrative tasks
Your employer may not provide salary sacrifice offers due to the potential for increased payroll staff obligations.
This is particularly true in the current financial climate, as salary sacrificing policies and regulations are prone to change.
There are many benefits of salary packing, and even more when using Novalease to avail of a novated car lease.
Why Apply For A Salary Sacrifice Towards Novated Car Lease At Askfunding?
✔️Australians Serving Australians
Askfunding has been a dominant provider of employee benefits, assisting thousands of Australians in making better financial decisions.
Use a mix of pre- and post-tax funds to pay for regular costs to reduce your tax payments and save money!
✔️Options For Flexible Packaging That Fit Your Lifestyle
There is no lack of benefits you could enjoy, from paying for daily costs to financing your car.
✔️A Low-Cost Approach To Purchasing Your Next Car
Our access to some very exceptional car discounts is unmatched. Additionally, we’ll handle everything, including finding your car, doing the paperwork, and setting your budget.
✔️Seamless Client Service
Salary sacrifice may be complicated, but we take pleasure in making it simple and easy to comprehend so that you can take advantage of all the benefits.
Using Salary Sacrifice For Everyone’s Advantage Is What Askfunding Can Do For You!
To handle your salary sacrifice and novated lease arrangement efficiently and successfully, Askfunding provides you with the end-to-end experience you need.
We can help you take full advantage of salary sacrifice, which can lower your expenses and provide your much-needed boost to owning a car at no additional cost.
Salary Sacrifice doesn’t have to be a sacrifice since we know how to provide you with the advantages as quickly as feasible. So let’s maximise your financial resources.
Contact Askfunding Today! We can assist if you’re ready to get started or need more information.