Salary Sacrifice Arrangements

Salary sacrifice arrangements are commonly referred to as salary packaging. It is an arrangement between an employer and an employee, where the employee agrees to forego part of their entitlement to salary or wages in return for the employer providing them with benefits of a similar value. Salary sacrificing reduces the employee’s taxable income and so reduces the amount of income tax paid by that employee.

An employee must enter into a salary sacrifice arrangement before earning the income; it can never be retrospective. It is usually more effective for employees on higher incomes as fringe benefits tax (FBT) is calculated based on the top marginal tax rate. There is no restriction on what can be sacrificed (other than the superannuation contribution caps) and the benefits generally provided in these arrangements fall into three categories: fringe benefits, exempt benefits and superannuation. 

The most common fringe benefits are car fringe benefits including novated leases, expense payment fringe benefits (e.g. private health insurance, children's school fees), car parking fringe benefits and entertainment.

An employer is required to pay FBT on the taxable value of benefits provided to the employees. The value of some of the benefits will need to be disclosed on the employee’s end of year income statement and although they are not taxable to the employee they are used to assess various levies, offsets, child support obligations and other government benefits. Some fringe benefits will not appear on the end of year income statement if they are non-reportable fringe benefits.

The most common exempt benefits are: living away from home allowance, portable electronic devices, protective clothing and tools of trade. An employer will not have to pay FBT on these exempt benefits and the value of the benefits will not need to be listed on the employee’s income statement. 

Employers who are not-for-profit entities or public benevolent institutions (PBI) also receive further FBT rebates or exemptions so it may be beneficial for employees of these organisations to salary sacrifice even when on lower incomes.

Note: that when entering a salary sacrifice arrangement with an employee, the employer should not be worse off as the cost of FBT is borne by the employee by forming part of their total remuneration package.

Superannuation can be salary sacrificed without incurring any FBT. Superannuation contributions are subject to contribution caps of $27,500 per annum for most employees under 75 years of age (the cap does not apply to some government employees). This is usually tax effective for individuals with a tax effective rate higher than 15%.

Example - Expense Fringe Benefit

Tim is an employee earning $90,000 per annum and is considering salary packaging. He is working for a small business entity (group turnover below $10 million).

On the 1 July 2022, Tim purchases a laptop (Laptop A) for $1,800 (including GST). On 1 January 2023, Tim decides to purchase a second laptop (Laptop B) costing $2,200 and a new mobile phone costing $1,200 (both including GST). All devices are used 60% for work purposes.

Based on these facts, Tim will increase his net disposable income by $1,027.218 by salary packaging the devices as illustrated below.