Keen for a new laptop, car, or even an airport lounge membership? Sick of putting your hand in your pocket for school fees, the rent or your mortgage? All of these things could be paid for through a salary sacrifice arrangement.
With the majority of a fresh financial year ahead of you, now is a good time to look at getting the most from your pre-tax earnings.
What is salary sacrificing?
Salary sacrificing, also known as salary packaging, involves you and your employer making an arrangement where they pay for goods and services out of your pre-tax salary.
As a result, you can reduce your taxable income and boost your disposable income.
What can you sacrifice?
It all depends on your employer and the industry you work in but there are three broad categories of things that can be packaged: those that attract fringe benefits tax (FBT), those which do not, and superannuation.
– Fringe benefits
Firstly, let’s clarify that when we say that these items attract FBT, it’s your employer who has to pay the tax, not you.
That can make offering these benefits less attractive for employers, although many will use the benefits as a great recruitment and retention tool.
Common fringe benefits include health insurance, car loans and novated leases, school fees and childcare fees.
It’s also possible – depending on your industry and employer – to use a salary sacrifice arrangement for home mortgage repayments, income protection insurance, disability insurance, rental payments, relocation expenses and even car parking and holiday accommodation.
– Exempt benefits
These are things your employer doesn’t have to pay tax on. They commonly include work-related items such as portable electronic devices, computer software, protective clothing, tools of the trade and briefcases.
You may also be able to salary sacrifice for work-related travel expenses (domestic or international), self-education expenses, professional memberships and subscriptions, home office expenses and airport lounge membership.
– Things to be mindful of:
Just because your employer offers you salary sacrifice doesn’t always mean it is a good deal, particulalry if you are thinking of buying real estate in the near future. Whilst there could be some tax benefits, using salary sacrifice for purchases you may not have the net income budget for could restrict your ability to get a loan. Brisbane Mortgage Broker Kain explains:
When you take a salary sacrifice on a new car for example, this will potentially reduce your taxable income (eg: pay less tax), however it can also becomes a technical liability and reduction in net income, which means servicing on your new home loan is lowered. In contrast, if you can salary sacrifice for home loan repayments, or superannuation, this could be an advantage as you are use pre-tax income to build an asset. So it really comes down to what you are salary sacrificing and is it an asset or liability.
The other thing to consider is if the salary sacrifice is voluntary or an ongoing commitment. Often, salary sacrifice and novated leases for cars are not easily cancelled, so many bank will treat these similar to a ongoing personal loan or credit card balance.
If you are unsure, or want to run a few different scenarios, always best to talk to an experienced mortgage broker before you sign the contract for the new car. There could be other options available.
– Superannuation Salary Sacrifice
You’re probably well aware that most employers will let you salary sacrifice into superannuation.
Doing so can boost your retirement nest egg in a tax effective way – you’ll pay just 15% tax on salary sacrificed into superannuation, rather than the marginal tax rate of up to 47%.
To get the most out of the arrangement, however, it’s important to look closely at the fine print.
That’s because, unless otherwise agreed, salary sacrificed super contributions are classified as employer super contributions, which means your employer can pay you less in super guarantee contributions.
It’s also important to ensure that you don’t go over the concessional (before tax) contributions cap and that your income doesn’t trigger Division 293 tax.
What next?
As with anything in life, there are pros and cons, swings and roundabouts.
Salary sacrificing is no different.
If you’d like to find out how to get the most from your pre-tax (and after-tax!) earnings, please get in touch today.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.