November 01 - Books - Tax Accounting

What is salary sacrificing?

It’s a term familiar to most of us… and the main thought that comes to mind when you hear salary sacrifice is something like “I know that’s a good tax thing”. You’re right, it can be a great tax strategy for employees! Here’s what you need to know.

In a nutshell, salary sacrificing (also known as salary packaging or total remuneration) is when you take home less income in return for certain benefits. Less income means less taxable income… means less tax liability. Hooray! But what other considerations are there?

What kind of benefits can you receive from salary sacrificing? 

Common examples:

  • Additional superannuation contributions
  • A car
  • Mobile phone
  • Laptop
  • Gym memberships
  • Car parking

Less common examples (and usually only offered by big businesses, non-for-profits and some other particular industries like public hospitals):

  • Payment of your expenses like loan repayments, childcare costs or school fees
  • Living away from home benefits such as rental payment or public transport payment

It’s important to remember that salary sacrificing usually pertains to items that are directly related to employment. The less common examples are occasionally offered by big businesses and the main reason for that is these kinds of benefits are liable for FBT – which the business also has to pay. 

The benefits available to you via your workplace will vary depending on their policies around it so take this list as ‘broadly speaking’ and discuss it directly with your employer. 

Salary sacrificing in non-for-profits and healthcare

Why is there potential for excellent salary sacrificing benefits in industries such as non-for-profits and healthcare (public hospitals in particular)? Because it’s broadly recognised that people in these industries deserve higher wages. Offering salary sacrifice incentives means that these employees are able to achieve a higher net income in their pockets. Home loan repayments and meals and entertainment allowances are benefits that many people in these industries can expect.

How much salary can you sacrifice?

When it comes to superannuation contributions, there’s a defined line in the sand (more on that below). For the other benefits however, it will depend on your workplace. There’s no ‘limit’ pur se, rather what your employer is willing to offer. You can scratch the Bentley off your list… 

Salary sacrificing superannuation 

This is the most common form of salary sacrificing and for good reason – additional super contributions before your income is taxed is a smart way to both save on the tax bill and increase your savings for the future. 

Usually, a super contribution is taxed at 15% which tends to be much lower than the marginal tax rate your income is liable for. If you need a reminder of tax brackets you can find those here.

These contributions are in addition to the 11% of compulsory contributions made by your employer. You can contribute $27,500 in total per financial year to your superannuation at the 15% tax rate. Check how much your 11% adds up to across the year and then calculate how much extra you could elect to contribute via salary sacrifice contributions to reach that maximum cap of $27,500. If you go over this amount, the contributions will be taxed the same as your marginal tax rate (so if you earn between $45k – $120k and are taxed at 32.5%, every dollar over the $27,500 into your super contributions will also be taxed at 32.5%). 

How much money can I save by salary sacrificing? 

This is of course dependent on how much of your salary you’re sacrificing. But to give you an idea:

Without salary sacrifice:

  • Your annual income is $80k
  • Your taxable income is $80k
  • Medicare levy is $1600
  • Tax payable is $18,067
  • Net income after tax: $61,933

With salary sacrifice:

  • Your annual income is $80k
  • You salary sacrifice $5k
  • Taxable income: $75k
  • Medicare levy is $1500
  • Tax payable is $16,342
  • Net income after tax: $58,658

So in this example, you’ve saved $1,725 in tax and whilst you’ve got $3,275 less in immediate take home salary, you’ve also gained $5000 in whatever benefits you chose – whether that’s a car, electronic device or super contribution. As you can see it’s a personal decision often based on what matters most to you – your net income or saving some tax dollars and enjoying one of the available benefits.

To calculate an example more accurate to your situation, head to tax calc.

If you need further help with anything tax advice, give us a call.