Salary Sacrifice

What is salary sacrifice / packaging?

The concept is quite simple but many Employers and Employees are not sure of the value it offers them. Instead of receiving the whole remuneration package as Gross Taxable Income on which Pay As You Go (PAYG) tax is payable, the Employee may elect to take part of their remuneration in some other form, typically the payment of regular expenses such as motor vehicle expenses.

The Employee’s remuneration is rearranged into a cash component that is subject to PAYG and fringe benefits that are taxed under the Australian Federal Government’s Fringe Benefits Tax (FBT) rules.

The type of items (also known as benefits) and value in sacrificing these items are determined by the Employer’s status under the legislation and the individual Employee’s marginal tax rate.

Most Employers are classified as Full FBT Employers, however there are also PBI (Public Benevolent Institutions) and Rebatable Employers. We cater for all Employer groups and their Employees in both advice & administration.

Bonafide salary sacrifice arrangements are legal under the Income Tax Assessment Act.

Salary Sacrifice Items

Prior to 1st April 1999 (introduction of Reportable Fringe Benefits), sacrificing was a simple decision but this was further complicated by the introduction of a cap on the tax free component on 1st April 2000. All Employees need to consider the most tax effective strategies that will provide the greatest ongoing benefits.

Employees restructuring their income through a mix of salary and benefits should do so in such a way that the greatest benefit to them is obtained.

Sacrifice for the sake of sacrifice may not improve an Employee’s financial well being. Care should be taken to ensure sufficient take home pay is adequate to meet normal living expenses.

Concessional Taxed Benefits – When a benefit has this status a reduced FBT (Fringe Benefit Tax) liability occurs. The taxable value of the benefit is determined by application of different formula as laid down by the ATO (Australian Taxation Office). The FBT (Fringe Benefit Tax) liability can be reduced by use of the ECM (Employee Contribution Method). An Employees’ marginal tax rate will determine whether it is beneficial to utilise the ECM or not.