Salary packaging can be a tax-effective way to pay for many of life's necessities. You can even use it to save for retirement.
How it works
A salary package is an agreement between you and your employer to pay for a specific item or service from your pre-tax salary. This process, known as salary sacrificing, reduces your assessable income so you may end up paying less income tax for the year. This means you'll potentially be better off than if you'd covered the same expense from your take-home pay.
Your salary package agreement must specify which expenses it covers. These are referred to as benefits. If you salary sacrifice an amount but don't end up receiving the associated benefit, this money is taxed as regular income at the end of the financial year.
Types of benefits
Goods and services that are commonly available for salary packaging fall into two categories: fringe benefits and exempt benefits. Superannuation is treated separately.
While there are generally no restrictions on what a salary package can cover, some employers may limit the types of benefits they're willing to include. So it's worth talking to your employer about your options.
This category typically includes a wide range of benefits, including:
- shares or property
- loan repayments
- school and childcare fees
- personal expenses like household bills.
In these cases, your employer may have to pay fringe benefits tax (FBT) on the benefits they provide. Depending on your salary package agreement, your employer may then reduce your salary to make up for the FBT they've paid on your behalf.
Some employers, however, such as public hospitals and charities, aren't liable for FBT unless the value of your benefits exceeds certain thresholds.
Any reportable benefits you receive will be listed on your payment summary or myGov income statement at the end of the financial year. Some may be used to calculate your Medicare Levy and assess your eligibility for tax offsets and other government benefits.
Exempt benefits include items that are primarily for work purposes, such as:
- computer software
- portable electronic devices
- protective work clothing
- tools and equipment related to your trade.
Exempt benefits aren't included in your annual payment summary, and your employer doesn't have to pay FBT on them. However, you can't salary package two similar items within a financial year, unless one is a replacement.
You can also use salary packaging to grow your retirement savings faster. Any money you salary sacrifice into super is taxed at just 15% – the same as your employer's compulsory Super Guarantee payments. So if your marginal tax rate is higher than 15%, you'll potentially pay less income tax if you make voluntary super contributions from your pretax earnings.
Remember though, there's a limit on how much you can salary sacrifice each financial year. So be sure your concessional contributions – that is, your employer's Super Guarantee payments and your salary sacrificed amounts – don't exceed $25,000 in total.
Salary sacrificing for first home buyers
In July 2018, the Federal Government introduced an initiative to help Australians get a foothold in the property market. Under the First Home Super Saver Scheme, you can now withdraw up to $30,000 worth of your voluntary super
contributions to put towards a deposit on your first home.
Because salary sacrificed contributions are taxed at just 15%, you could potentially save for a deposit faster in your super fund than by putting your after-tax earnings into a savings account.
To take advantage of this scheme, set up a salary sacrificing agreement with your employer. When you're ready to withdraw the money from your super, you can apply to the Australian Tax Office.
But be careful: you can only release this money once, and it must be used within 12 months towards buying or building your first home. You also have to live in the property for at least six months during the first year of ownership.1
Get the right advice
Everyone's financial situation is different, so ask us how salary sacrificing will affect your tax position. You can also talk to us about how a salary package could help you achieve your lifestyle goals sooner.
1 ATO, First Home Super Saver Scheme, 2019.