What is salary packaging in Australia and how does it affect my tax?
Salary packaging, or salary sacrifice, is an arrangement with your employer to pay for certain expenses directly from your pre-tax income, reducing your taxable income and potentially your overall tax payable in Australia.
Was this helpful?
8 readers found this helpful
8 readers found this helpful
How it works in practice
Understanding Salary Packaging
Salary packaging, also known as salary sacrifice, is an agreement between you and your employer to pay for some personal expenses or benefits directly from your gross (pre-tax) salary. This arrangement effectively reduces your assessable income, meaning you pay income tax on a lower amount.
How It Works
Instead of receiving your full salary and then paying for expenses with your after-tax income, your employer uses a portion of your pre-tax salary to cover agreed-upon costs. Common items that can be salary packaged include superannuation contributions, car leases, laptops, professional memberships, or specific benefits like novated leases. The key advantage is that the money used for these benefits is deducted before income tax is calculated.
Tax Benefits and Fringe Benefits Tax (FBT)
The primary tax benefit of salary packaging is a reduction in your taxable income, which can lead to a lower income tax bill. However, most benefits provided through salary packaging are subject to Fringe Benefits Tax (FBT), which your employer pays. Some benefits, like certain superannuation contributions or specific items for FBT-exempt organisations (e.g., public hospitals), might be FBT-exempt or concessional, offering greater tax savings for the employee. It's crucial to understand which benefits are FBT-liable and their impact.
Important exceptions
Not all employers offer salary packaging; it is entirely at their discretion. Also, not all expenses can be salary packaged, and the types of benefits available depend on your employer's policy and whether they are subject to FBT. For example, cars are often salary packaged via a novated lease, which has specific FBT rules. The net benefit to you depends on your income level, the specific items being packaged, and your employer's FBT obligations and whether those costs are passed on to you.
Some FBT-exempt organisations (e.g., charities, public hospitals) have different rules that allow for greater tax savings on packaged benefits.
What you should do now
-
Check with your employer's HR or payroll department to see if they offer salary packaging arrangements.
-
Review the list of eligible items or benefits your employer allows to be salary packaged and understand their specific terms.
-
Calculate the potential tax savings by comparing your current after-tax income and expenses to the projected scenario with salary packaging.
-
Understand any Fringe Benefits Tax (FBT) implications, particularly who bears the cost of FBT (your employer or partially you).
-
Seek independent financial advice to ensure salary packaging is suitable for your individual financial situation and goals.
Expert Notes
No expert notes have been added to this question yet.
People also asked
Explore highly relevant questions and get instant verified short answers.