Salary packaging has evolved into more than just an industry buzz word. The benefits for employees have been significant – and more businesses are taking it on board to reap the rewards. Also referred to as salary sacrifice, a salary packaging is an arrangement between you and your employer. This arrangement allows the company to pay for goods or services on your behalf out of your pre-tax salary.
Generally, it’s most effective for people on mid-to-high incomes but can be beneficial to anyone who pays tax. The rewards for taxpayers means your taxable income is reduced and disposable income increased. But the benefits don’t stop there. Here’s why salary packaging can help you!
Salary Packaged Benefits vs Cash Remuneration
Salary packing allows you to opt for benefits instead of cash remuneration. Whilst the sound of salary ‘sacrificing’ might sound like a bad idea initially, and most employees prefer the sound of getting the money, it actually saves you more.
For example: If you have purchased a mobile phone that’s used predominately for work purposes you can benefit from salary packaging. Let’s assume you have paid $770 for the phone. If the device is salary packaged through your employer, you would save the GST amount ($70) and the tax amount (roughly $245 for a $770 phone). This means the phone would only cost you $455.
In this example, the phone is the benefit and works out to be more cost-effective than the cash remuneration. Instead of receiving a cash salary of $1,185 and paying tax of around $415 (leaving you with $770 to buy the phone), it’s easier and more beneficial for you to have the phone benefit salary packaged.
How it Works
Using the same example above, the entire payment for the phone is from your pre-tax salary. Because it’s work related and is deemed an employer expense, your employer claims back the GST and refunds it to you. From the total $770, the GST of $70 is funded by your employer. And because the balance of the $700 is pre-tax, you eliminate having to pay tax on the $700 which saves you a total of $275.
The Australian Tax Office is allowing you to save the tax through the salary packaging arrangement. Thus, you’re saving yourself $315 in total. This same concept can be applied to other work-related benefits too.
Other Benefits You Can Salary Package
Cars are one of the main items that are usually salary sacrificed through your employer. For a normal tax paying employer, the benefits can also include portable devices like laptops and phones, airport lounge memberships, self-education, union fees, professional subscriptions and additional superannuation. Other work related expenses like trade tools, travel expenses and uniforms can be salary packaged too. For some cases, you can even package 50% of your rent, providing your employer is in a remote area.
Novated Leasing is the largest of the benefits. As a rule of thumb, if you’re driving a car and paying tax, you could be saving approximately $3,000 in tax per year. Your existing vehicle can be packaged by doing a sale and leaseback. The only requirement for this is that the car cannot be older than 10 years at the end of the lease. If you have more than one car, you can package the additional vehicle too and save more.
The key principle to bear in mind is, the benefits you use through salary packing are determined by your employer’s tax status and where they’re located.
How to Start Salary Packaging
The first step you need to do is speak to your employer. Some firms specialise in providing staff with salary sacrifice and FBT (Fringe Benefit Tax) options, while others can be approached on a case-by-case basis. If you are salary packaging a benefit, you will not be able to access the specified amount of wage being sacrificed. This is applicable for the full period of the arrangement. If the benefit is additional superannuation, it must be made with one of the complying super funds too.
Salary packaging rewards employees with superannuation investments and fringe benefits. As a result, less tax is paid and you can enjoy more spending money by making your salary go further. Want to know more about how we can help? Contact us today to find out.