Should You Consider Salary Sacrificing?
What is salary sacrificing and who is it for?
What is it?
Salary sacrificing means allotting a portion of an individual’s pre-tax salary to be exchanged with a benefit that is of similar value. Also referred to as salary packaging or total remuneration packaging, this requires an individual to come to an agreement with their employer prior to enjoying its benefits.
It offers a great way to boost retirement savings and reduce taxable income.
The Australian Taxation Office provides the specifics of this agreement. It’s important that an individual gets everything clear–and in writing–because you will permanently forego the sacrificed salary and also because they can attract Fringe Benefits Tax.
What can one salary sacrifice?
According to the ATO, there’s no restriction to the types of benefits that can be included because these would simply replace what would have been paid to the individual as wages.
The benefits are categorised into three:
1. Fringe benefits
- health insurance
- school fees
- childcare fees
- other personal expenses
2. Exempt benefits
- portable electronic device
- computer software
- protective clothing
- tools of the trade
Sacrificing salary to super is:
- a great way to boost a nest egg; and
- a good way to reduce tax
How much can one sacrifice?
The annual cap for pre-tax super contributions for 2018/19 is $25,000.
This amount includes all salary sacrifice contributions, regular employer-initiated super contributions (which is usually 9.5%), and personal contributions where one intends to claim a deduction.
Bear in mind that for individuals whose income + pre-tax super contribution is under $250,000 p.a., they will pay 15% tax on salary sacrificed contributions.
On the other hand, those with income and pre-tax super contributions that exceed $250,000 p.a. will have to pay 30% tax on salary sacrificed contributions.
Setting up an agreement
Employers and individuals need to come to a clear agreement on all the terms of a salary sacrifice deal. It is highly recommended to get it in writing since an undocumented arrangement may cause difficulties in establishing the facts of the deal if issues arise in the future.
Remember that employees can renegotiate a salary sacrifice arrangement at any time.
Salary sacrificing to a super fund
There are tax issues you need to be aware of, however. Since the amount sacrificed into super is considered a concessional contribution it be taxed at a flat rate of 15%. Do you want to know more about superannuation? Click here.
How effective salary sacrificing is actually depended on your individual financial situation. That’s why before you enter into any agreement, it’s best to seek help from a financial adviser. Book an appointment today by clicking here.
IMPORTANT INFORMATION: This blog has been prepared by Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licences (Number 233209). The information and opinions contained in this presentation is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. Any individual making any investment or borrowing decisions should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to borrow funds or purchase, sell or hold any particular investment. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of, credit contract entered into or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog may change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.