What is salary sacrificing and how does it reduce my tax in Australia?
Salary sacrificing is an arrangement where you agree with your employer to forgo part of your future salary or wages in return for non-cash benefits of a similar value. It reduces your taxable income, potentially lowering the amount of income tax you pay.
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How it works in practice
What is Salary Sacrificing?
Salary sacrificing, also known as salary packaging, is an agreement between an employee and employer where the employee agrees to receive a lower gross salary in exchange for their employer providing them with benefits of a similar value. These benefits are paid for from your pre-tax income, meaning they are deducted before income tax is calculated.
Common benefits include additional superannuation contributions, novated leases for cars, laptops, or professional memberships. The key is that the agreement must be made for future income and not for salary already earned.
How Does it Reduce Your Tax?
When you salary sacrifice, your assessable income (the amount your income tax is calculated on) is reduced because a portion of your income is converted into non-cash benefits. As a result, you may pay less income tax because you are being taxed on a lower gross amount. This can be particularly beneficial for those in higher income tax brackets, as the tax savings can be significant.
However, it's important to note that many salary sacrificed benefits are subject to Fringe Benefits Tax (FBT), which the employer pays. Some benefits, like superannuation contributions within caps, are taxed concessionally within the super fund.
Important exceptions
Not all employers offer salary sacrificing, and the types of benefits available vary. There are strict caps on superannuation contributions that can be salary sacrificed, exceeding which can result in additional tax. The arrangement must be formally documented before you earn the income, and FBT may apply to certain benefits, which the employer is liable for. You cannot sacrifice income you have already earned.
What you should do now
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Research your employer's salary sacrificing policy and available benefits, as not all workplaces offer this option.
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Identify which eligible benefits align with your financial goals, such as superannuation, novated leases, or professional development expenses.
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Calculate the potential tax savings and impact on your take-home pay by using ATO resources or a financial planner.
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Formalize the salary sacrifice agreement with your employer in writing before any work is performed, ensuring all terms are clear.
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Regularly review your salary packaging statement to ensure contributions are correct and benefits are being managed efficiently.
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