Salary package or salary sacrifice?

A salary sacrifice arrangement is also referred to as salary packaging¹ and may have significant benefits for you.

Salary packaging, also known as salary sacrificing, is a formal arrangement between an employer and an employee, for the employee to forego future income in return for the employer providing them with benefits of a similar value.

Generally, it means you agree to receive a lower income each pay in return for your employer providing you with benefits of a similar value to the reduction in pay.

The benefits could be things like a car or a phone, or having contributions paid into your super fund.

What is important is that the benefits form part of your remuneration, replacing what would otherwise be paid as income.

A further benefit that comes from salary sacrificing, is that by reducing your taxable income, you may pay less income tax depending on your individual circumstances.

What to know before you salary sacrifice

The current ATO requirements for an effective salary sacrifice arrangement are that:

• The arrangement should be entered into before you perform the work
• There should be an agreement between you and your employer – the contract should be in writing, but may be a verbal one, and
• There should be no access to the sacrificed salary, as the sacrificed salary must be permanently forgone for the period of the arrangement.

Types of salary sacrifice benefits

ASIC’s MoneySmart website² states that salary packaging benefits fall into three categories:

• Fringe benefits
• Exempt benefits
• Superannuation.

Exempt benefits are things like tools of your trade, protective clothing, or computer software.

Fringe benefits can include things like a car, health insurance, school, or childcare fees.

Thirdly, you may choose to salary sacrifice into your super. Even if you arrange to salary package benefits such as the fringe benefits described above, you can still salary sacrifice into your super as well.

Salary sacrificing super

Salary sacrificing into your super means having some of your pre-tax income paid into your super fund, instead of it being part of your take home pay. The option to salary sacrifice is voluntary.

Salary sacrificed super contributions, under an effective salary sacrifice arrangement, are taxed under superannuation rules. This means salary sacrificed super contributions are not fringe benefits when contributed by an employer on behalf of an employee to a complying super fund.

In line with superannuation tax rules, your super fund will deduct 15%³ of your salary sacrificed super contributions, similar to the tax paid on your employer's contributions. For most people this may be lower than the income tax they would pay on this money if it was in their take home pay. They therefore get the benefit of paying less tax while boosting their retirement savings.

As a further benefit to you, the salary sacrificed super contributions are not counted as assessable income for tax purposes. This means that it is not subject to income tax at your marginal tax rate, instead just the taxes described above.

However, there's a cap to how much extra you can contribute in salary sacrificing to super before possibly being subject to additional tax. The combined total of your pre-tax contributions, which includes contributions your employer pays for you on top of salary sacrificed amounts, must not be more than $25,000 per financial year.

However, you may be able to have more than $25,000 contributed in a year if less than $25,000 was contributed in earlier financial years. This is called the carrying forward your before-tax contributions. You can check how much more you can contribute on ATO online services (accessed via myGov) as conditions do apply.

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Make smart decisions with the help of a professional financial adviser.*

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* Deciding what is best for you will depend on your personal circumstances and you may want to seek personal financial advice to get the most from your superannuation. You can find out more about financial advice options at qsuper.qld.gov.au/advice

1. Australian Taxation Office, November 2019, Salary sacrifice and salary packaging, accessed 21 January 2021 at www.ato.gov.au
2. Australian Securities and Investments Commission, MoneySmart, Salary Packaging, accessed 21 January 2021 at www.moneysmart.gov.au
3. If your income plus concessional contributions is more than $250,000 per year, different tax rules apply. You may pay tax of 30%, instead of 15% on your some or all of your pre-tax contributions once the $250,000 threshold is exceeded.