Attracting skilled employees and keeping them long-term is key to growing a successful business. Yet, managing talent isn’t simple—it involves more than just understanding tax and payroll requirements. One way to enhance employee satisfaction and retention is by offering added perks.
One such option is salary sacrifice. This arrangement allows employees to allocate a portion of their salary before tax toward specific benefits, effectively reducing their taxable income.
When implemented well, salary sacrifice can serve as a valuable incentive for both recruiting new talent and retaining current staff. It creates mutual advantages for employers and employees alike.
This guide explores the essentials of salary sacrifice, how it works, and its implications for tax, payroll, and financial reporting.
What Is Salary Sacrifice?
Salary sacrifice—also known as salary packaging—is an arrangement between an employer and employee in which the employee agrees to give up part of their pre-tax earnings in exchange for certain benefits. These can include superannuation contributions, vehicles, or other non-cash perks.
Among the most common uses is contributing to superannuation. By diverting some of their gross salary to their super account, employees may benefit from tax savings while planning for retirement.
Approved by the Australian Taxation Office (ATO), salary sacrifice allows pre-tax earnings to be used for eligible expenses, potentially decreasing the amount of tax owed.
How It Works
In a salary sacrifice setup, the employee decides on a portion of their salary to go toward specific benefits before any taxes are applied.
For example, if someone earns $50,000 annually and sacrifices $5,000 for a home loan, only $45,000 is counted as taxable income. That $5,000 is directed toward their mortgage, reducing overall tax liability.
What’s Typically Included in Salary Packages?
While a salary refers to the fixed yearly income paid regularly (e.g., monthly or fortnightly), a salary package is broader. It includes the base salary plus additional perks, which can be either monetary or in-kind. Common elements include:
Fringe Benefits
These are extra perks provided in addition to standard wages. They aren’t taxed like regular income but are subject to Fringe Benefits Tax (FBT). Examples include:
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Company vehicles
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Health insurance
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Gym memberships
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Housing or relocation assistance
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Travel reimbursements
Exempt Benefits
Certain fringe benefits are FBT-exempt. These typically include:
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Work tools: Laptops, tablets, phones, safety gear, calculators
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Low-value items under $300
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Relocation assistance
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Emergency-related benefits
Super Contributions
Employees can direct part of their pre-tax earnings into their super fund, often taxed at 15%, which is typically lower than their income tax rate.
However, there’s a cap—currently $27,500 annually—on concessional contributions. Contributions over this threshold may incur additional tax. It’s essential to note that salary-sacrificed super is considered an employer contribution, which may impact eligibility for certain government offsets or benefits.
Additional Inclusions
Salary packaging isn’t restricted to the above. Depending on company policy and personal circumstances, other items can be included, such as:
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Car leases and associated costs
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Loan repayments
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Parking permits
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Education and training fees
Pros and Cons for Employers
Advantages:
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Attracting Talent: Offering salary packaging can make job offers more competitive and appealing.
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Retention and Engagement: Employees who feel valued through flexible compensation options are more likely to stay.
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Motivation and Productivity: Tailored benefits can increase job satisfaction and work output.
Challenges:
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Increased Administration: Managing these arrangements can add complexity to payroll processes.
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Regulatory Compliance: Adhering to tax rules and employment laws is essential to avoid penalties.
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Potential Costs: Some benefits, particularly those attracting FBT, may increase costs rather than reduce them.
What Can Be Included in Salary Packaging?
The range of benefits depends on the employer’s policy and the employment agreement. Potential inclusions are:
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Car-related Costs: Fuel, leasing, servicing, insurance
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Entertainment: Meals, holidays, tickets
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Living Expenses: Groceries, utilities, rent or mortgage payments
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Schooling: Tuition fees
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Insurance: Premiums for various types of cover
Expert Payroll Support
Salary sacrifice can be a powerful tool to improve employee satisfaction, reduce tax burdens, and foster long-term loyalty. However, it requires precise management and a clear understanding of tax implications.
Partnering with payroll professionals—like those at ax Visory—can simplify the process. From compliance and reporting to accurate payroll adjustments, expert help ensures your salary packaging program works smoothly.
Connect with Tax Visory today to explore how salary sacrifice can enhance your business operations and employee benefits.
