Is salary sacrifice a good idea?
You need to seek personal financial advice from a financial adviser to determine if salary sacrifice is a good idea.
‘Salary packaging reduces your taxable income and so reduces the amount of income tax you pay.’ – ASIC
Salary sacrifice is simple to set up and the benefits can be huge.
So what exactly is it? And how can you take advantage of this Australian Tax Office authorised way of restructuring your income?
Often called salary packaging, it provides a popular solution to make the most of your income. This is through an approved arrangement that benefits both employers and employees. It is where you can pay for a range of everyday goods and services at zero risk to your employer. For example, under a salary packaging agreement you can purchase items such as a car, a laptop or a mobile phone out of pre-tax pay. It means you can get a better deal on the item you want. You also lower your taxable income so you pay less tax and have more money in your back pocket.
Who benefits from salary sacrifice? Packaging is a proven legal method of increasing your net pay. It is more effective for people on mid to high incomes. However, anyone paying an income tax rate above 15 per cent can benefit.
What can you package?
The items you can purchase under a salary packaging agreement depend on your profession and the type of organisation you work for. There is usually no restriction on what can be packaged but for ATO purposes, benefits fall into three categories:
- fringe benefits (FBT)
- exempt benefits
Fringe benefits: cars, property (including land and buildings), shares or bonds, and expense payments such as car loan repayments, school fees, child-care costs, home-phone costs and health insurance.
Exempt benefits: portable electronic devices, computer software, protective clothing, tools of the trade and briefcases.
Superannuation: Your employer already has to pay 9.5 per cent of your salary (from July 1, 2014) into your super fund. So topping it up via salary sacrifice will further aid retirement. The perk is the fact the tax on the super contribution is just 15 per cent on earnings (like interest) from the invested money. For example, salary sacrificing $10,000 a year into super could reduce your tax by as much as $1,500 on an income of $45,000.
Consider the type of lifestyle you want in retirement
With that in mind, consider the type of lifestyle you want in retirement. Next you’ll need to estimate the income required. This is where a Financial Adviser can assist. Once you identify how much extra is needed, compounding takes over to boost super savings. Of course, the earlier you start, the longer your investment earnings have to grow. Case in point, a weekly salary sacrifice amount of $20 results in a cash-flow loss after tax of $16.70 a week at the lowest tax rate, and $13.70 at the tax rate most people pay. Over a 40-year period, a person can put an extra $136,810 into super. For example, you will be able to earn about an extra $156 a week in retirement by foregoing about three Big Mac meals a week. This is because of the increased amount you will have in superannuation.
Are there limits on how much you can salary sacrifice?
You must enter into the salary sacrifice agreement before you earn any income. So, before setting it up, check what limits your employer has on the maximum amount you can sacrifice. Also make sure that they allow you to change or stop the arrangement whenever you want.
Next talk to your Financial Adviser to discuss how you can make salary sacrifice work best for you because if you exceed certain limits, called contribution caps, any contribution over this amount may be taxed up to the highest marginal tax rate plus the Medicare levy, and an interest charge to recognise this tax is collected later than income tax. [From July 1 2019, the concessional contribution cap for the 2019-2020 financial year is $25,000 for people of all ages.
ASIC publishes a handy guide about Salary Packaging too.
If you’d like to chat about finance, please contact us.View more