Salary Sacrifice for Employees: How it Works

The key to tax-effective salary sacrifice is for the employee to take some of their remuneration in the form of concessionally taxed benefits instead of taking it all as fully assessable salary. This procedure is called 'Salary Sacrifice' because the employee sacrifices some part of their salary in return for the desired benefits.

Packaging needs the agreement of both employer and employee. For the employer, packaging has some advantages such as the ability to attract employees. It may also act as an incentive to increase productivity.

However the administration costs need to be considered. As such, some employers only offer limited forms of packaging.

What Can I Salary Sacrifice?

The most common salary packaging items are:

• Car fringe benefits (i.e. Novated Lease)
• Expense payment fringe benefits (incl. otherwise deductible)
• Living Away From Home Allowance fringe benefits
• Car parking fringe benefits
• Superannuation.

Benefits of Salary Sacrifice

The advantages of salary sacrifice are that you are buying the benefit in pre tax dollars. That is, if your tax rate is 32.5%, you get 32.5% better buying power.

Example:  Say an individual earns $100,000 a year and wants to lease a new car. The lease paymenets and running cost of the car will cost $22,000 each year,.Had they entered into a salary sacrifice agreement with their employer, the $22,000 for the car would be taken out of their taxable income before the tax is paid. Their employer may pay Fringe Benefits Tax (FBT) on the value of the benefit, which they will pass on to the employee, but with benefits that are subject to concessional treatment, such as cars, the FBT will often be lower than the income tax that would have been payable on the salary sacrificed amount, resulting in a tax saving by the employee. From 1 July 2022, certain zero or low emission vehicles are exempt from FBT.

Note:

• The above calculations have not taken into account Fringe Benefits Tax (FBT) as this depends on a few factors:
  • Does your employer pay the FBT?
  • Do you reimburse your employer for the private use?
• The private use of the car affects the FBT payable
• Some benevolent institutions do not pay FBT
• FBT is payable by the employer not the employee
• Many salary package deals require the employee to reimburse the employer for the FBT costs out of the salary package.

Points to note:

• Motor cars are subject to FBT but have concessional rates according to private use
• Expenses such as school fees, personal expenses and mortgage payments attract Fringe Benefits Tax which is based on the top marginal rate of tax.

Superannuation Contributions

If salary sacrificed super contributions are made to a complying super fund, the sacrificed amount is not considered a fringe benefit for tax purposes.

The amount of the contribution will not be liable to fringe benefits tax and the contributions will not be included as a reportable fringe benefit amount on the employee's payment summary. Salary sacrificed contributions are treated as employer contributions.

As superannuation contributions are not subject to FBT and are not reportable benefits, they are attractive to salary package. The amount that is salary sacrificed is taxed in the superannuation fund at 15%. An employee on 30% marginal rate will save 15% tax on every dollar that is salary sacrificed into super. The employee on higher marginal tax rates will have higher savings.

Concessional Contributions Cap

Salary sacrificed contributions to a super fund form part of the 'concessional contributions' in the fund.

Employer contributions made under the super guarantee also form part of an employee's 'concessional contributions'.

Concessional contributions are included in the assessable income of the fund and taxed at 15%. However, there is a cap on the amount of concessional contributions that each member can enjoy each income year. If a person has contributions made to more than one superannuation fund, all contributions are aggregated.

The amount of concessional contributions you can make is currently $27,500 for the 2024 year. This will increase to $30,000 for the 2025 year. However, if you have unused concessional cap amounts from previous years, you may be able to carry them forward to increase your contribution caps in later years. You're eligible to do this if you have a total super balance of less than $500,000 at 30 June of the previous financial year and unused concessional contributions cap amounts from up to the 5 previous years .

Exceeding the Concessional Contributions Cap

If the concessional contributions cap is exceeded any excess concessional contributions are included in the assessable income for the corresponding year and taxed at the person's marginal tax rate. 

If the concessional contributions cap is exceeded and the calculated tax liability for the year includes the excess contributions, the ATO then applies a 15% tax offset which takes into account that contributions tax has already been paid on the excess by the super fund provider.

The ATO also allows for a withdrawal of up to 85% of the excess concessional contributions from the superannuation fund which can be used to pay the arising tax liability from excess concessional contributions. Any excess concessional contributions withdrawn from the fund also no longer count towards the persons non-concessional contributions cap.

Looking for advice on salary sacrificing? We can help you out. Contact us today on 13 23 25 or visit us at an office close to you.

This information sheet is intended as a guide for H&R Block clients as an outline of how salary sacrifice works. You should seek further advice prior to entering such an arrangement.

H&R Block is Australia's largest network of tax accountants with over 400 offices. Every year we help thousands of Australians achieve a better taxation result. For your nearest office call 13 23 25.

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