Salary packaging, also known as salary sacrifice, is actually a financial arrangement whereby Australian employees receive part of their income in non-cash benefits instead of receiving a direct salary. is particularly popular in Australia, especially in the healthcare, not-for-profit, government, and education sectors, as tax concessions often apply. Knowing what is salary packaging, how it works, what benefits are available, and its potential advantages and disadvantages will help employees make the right financial decisions.
How does salary packaging work?
- In a typical salary arrangement, the employee takes home his full income as taxable wages.
- In salary packaging, on the other hand, an employee agrees to give up some of his pay in return for particular perks.
- Usually paid before tax is deducted, these advantages can lower taxable income and consequently the tax due amount.
For instance, an employee might opt to package $10,000 worth of benefits—such as car payments or extra superannuation contributions—instead of $80,000 as taxable income. They are only taxed on $70,000, hence, there may be large tax savings.
Who can benefit from salary packaging?
Many Australian workers have salary packaging, however, the industry, company, and personal financial status will determine the degree of the benefits.
Public and not-for-profit sector workers
Tax-free living expenditures are the most often occurring advantage for employees in education, elder care, healthcare, and charitable organizations.
Private sector employees
Private company employees also have the right to salary packaging on superannuation, car leasing, and work-related expenses. Their choices may not be as diverse as those offered to not-for-profit sector employees.
High-income earners
Salary packaging is an excellent strategy for people with high incomes because it allows them to lower taxable income and therefore reduce their tax liability.
Employees looking to boost their superannuation
Salary sacrifice into super is a smart move for those people who wish to accumulate super savings but take advantage of lower rates of tax applicable on concessional contributions to superannuation. This means considerable tax savings for employees who fall into the higher tax brackets.
Key benefits of salary packaging
Higher net pay: Because they pay essential expenses with pre-tax dollars, employees are able to boost their net take-home pay.
Improved financial planning: This type of salary packaging helps employees budget money for necessary expenses and better plan their finances in general.
Enhanced retirement savings: Salary packaging superannuation contributions can help an individual retire comfortably and save on taxes.
Potential drawbacks and limitations
Impact on government benefits
Lower taxable income can affect other government benefits, such as Centrelink payments or HELP repayment thresholds.
Employer and industry restrictions
Not all employers offer salary packaging. It also depends on the industry and employment contract for an individual.
Fringe Benefits Tax (FBT) Implications
While most salary-packaged benefits are tax-effective, others may attract FBT, which could offset potential savings.
Complexity
Salary packaging arrangements can be complex and involve proper management to ensure compliance with tax laws and avoid unintended financial consequences from salary packaging.
How to set up salary packaging
To set up salary packaging, just follow these general steps:
1. Check employer eligibility: Confirm whether your employer offers salary packaging and which benefits are available.
2. Use a salary packaging provider: Many third-party providers handle this for many organizations to keep their salary packaging within the regulatory lines of the tax authorities.
3. Select benefits to package: The kinds of benefits one can pick are those corresponding to one’s needs and financial condition.
4. Formalise the agreement: In writing, such an agreement explains what amount from the salary of a person can be surrendered or foregone by them in consideration for receiving selected benefits.
5. Monitor your package: Periodically assess your salary packaging to ensure that it remains useful for your pocket and tax effective.
Conclusion
Salary packaging is a great financial strategy that assists Australian employees reduce taxable income, increasing take-home pay, and managing expenses in a more effective way. This can result in very significant savings for those who are eligible, especially those working in the not-for-profit and public sectors. It is always a good idea to seek professional advice from a financial expert or salary packaging provider to ensure that the arrangement suits your individual needs and maximizes your financial benefits.
