Did you get a tax bill last financial year?
That could partly be due to the end of the low- and middle-income tax offset as of last year.
Depending on what industry you're in and the benefits your employer offers, there might be a way to reduce your debt in future tax returns.
It's called salary sacrificeand here's how it works.
How does salary sacrifice work?
It's an agreement between you and your employer that relates to how you get paid.
It would involve you getting less income before tax.
In return, your employer covers that amount by paying for certain benefits of similar value for you.
Think of it as swapping a slice of your pay cheque for other forms of perks.
What's left of your pay cheque then becomes your new taxable income, which would be lower than the original amount.
And with reduced taxable income, you may pay less tax on your wage at the end of the financial year.
What types of salary sacrificing are there?
The list of benefits differs from industry to industry, and it ultimately comes down to what your employer offers.
Benefits are divided into three categories:
Fringe: This can look like a car, accommodation or even insurance – and can sometimes be GST-free. However, your employer will need to pay a fringe-benefit tax (FBT) and they might pass on some of the costs to you to lower that amount. These benefits may alsoaffect your adjusted taxable incomeused to assess entitlement to various Centrelinkbenefits.
Exempt: Usually reserved for work-related goods or services. Some examples are portable electronics, a tool of trade,protective clothing or eventhe use of an eligible electric vehicle.
Superannuation: This is whereyou make extra payments to your superannuation fund. Whatever you contribute will get taxed at 15 per cent — which may belower than yourusual tax rate.
Fringe and exempt benefits are more commonly known as salary packaging.
What can yousalary sacrifice?
Here are some benefits that have come upindifferent industries.
- Car leasing
- Laptop
- Mortgage
- Rent
- Meals
- Education
- Electronic devices
- Investment loan
- Airline membership
- Holiday accommodation
- Car parking
- Childcare
- Superannuation
How much are you allowed to salary sacrifice or salary package a year?
There is no real cap as to how much you can salary packagebut your employer will determine the amount of your benefit.
But if you work in a public benevolent institution, your exempt benefits are capped based on your employer type —which goes by tiers.
However, the cap only appliesto one workplace, so if you have multiple jobs, you'll have a higher overall cap.
And there is alimit for how much you cansalary sacrifice into super — for the 2023-24 financial year, it's $27,500.
That limit also includes your employer's contributions into your super, as well as any contributions you make and claim a deduction for.
For some people, any unused portion of the cap amount may also be brought forward for up to five years.
How do I know if I'm eligible?
The type of employment contract you hold can determine whether you'll have access to these benefits.
Some workplacesonly offer salary packaging to full-time or part-time employees.
You can check in with your employer or payroll department to find out.
Who can benefit from this?
We asked two financial advisors, Ellie Fordham and Deline Jacovides, for their take on the pros and cons.
Ms Fordham believes anyone paying tax can benefit from salary packaging and says,"it can be quite meaningful"especially when companies offer exemption benefits.
Instead of having to wait until the end of the financial year to claim tax deductions, the amount gets offset fromyour taxable income up-front.
"That's effectively tax-free income which might go directly to your home loan or can be used to pay childcare expenseswhen they come up."
"A lot of people use it for budgeting,"especially on novated leases for cars says Ms Fordham.
Under the arrangement, the monthly deduction coversoperating costs like fuel, rego and insurance.
"You don't get that shock when the [bill] comes once a year, because it's [already] paid for through the novated lease," she says.
But when it comes to salary sacrificing into a super fund, Ms Jacovides believes it benefits middle- to high-income earners.
She explains it's becauseAustralia operates on a tiered tax system.
When you earn past the tax-free threshold, you get taxed 19 per cent of your income at the least. That figure goes up to 21 per cent when combined with the medical levy.
"There's only a 6 per centdifference between sacrificing some of [your salary] into super versus getting that in your bank account, so that's why it's not as much tax savings [for those earning] under $45,000," Ms Jacovides said.
Can salary packagingbe used toreduce tax debt?
If you've completed your tax returns this year, you may have noticed that it's less than what you got back last year or you might even have incurred a debt.
Ms Jacovides makes it clear that "it's not because you're paying more tax" but rather a "rebalancing or reconciliation has occurred from not paying enough tax throughout the year", or following the end of the low- and middle-income tax offset.
Salary packaging can be one way to reduce the overall taxes paid throughout the year, depending on how you structure it, Ms Jacovides said.
But she warns to be careful, especially if you have taken up Centrelink benefits, because"it can also create a debt".
It's also important to note that, where benefits require employers to pay fringe benefits tax, your employer may pass on this cost to you to be paid out of your after-tax salary.
Key considerations for salary package
There are added costs to consider, especially on novated leases foracar, Ms Fordham says.
One of which is the amount that's left to pay on the car at the end of the lease term.
"Oftenif you're not planning for that, you can get locked into the cycle of repackaging the vehicle or selling that car to [clear] off the residual [payment]," she says.
According to Ms Fordham, companies wouldwork withsalary packaging providers to offer you deals from various novated lease providers.
The leases usually comepackaged withinterest rates and administration fees, on top of the monthly payment amount.
"You might be able to get seven quotes for seven different interest rates to then work out which one you'll take up,"said Ms Fordham.
If the novated lease is offered as a fringe benefit,part of the monthly deduction will also come out of your salary after tax to help your employer lower the FBT.
However, the government has made an exemption for electric vehicles to encourage an uptake.
"If the value of the electric vehicle is less than the luxury car tax threshold ($89,332), then all of the novated lease will be pre-tax," Ms Fordham said.
Keyconsiderations for salary sacrifice into superannuation
Ms Jacovides says thebiggest downside is that there is no turning back.
The contributed amount cannot be taken out except in limited circumstances including:
- waiting until at least 65years old
- being permanentlyretired after the age of 60
- releasing under the First Home Super Saver Scheme to purchase a first home
If you have a HECS-HELP debt, the repayment will be based on the reduced taxable income.
However, the amount put intosalary sacrifice will get added back during tax time for HECS-HELP calculation purposes.
"With the cost of living right now, you got to be very confident that when you put money away into your super, it's not going to be needed for a while,"said Ms Jacovides.
How can I enter or leavean agreement?
First, speakto your employer or payroll manager to find out more about the salary sacrifice or salary package available to you.
Once you're clear onthe benefitsoffered, you mayseek advice from a financial consultant before entering an agreement.
Most superannuation providers are also able to answer any queries relating to salary sacrifice.
At any time the arrangement no longer works for you, it's as easy to stop or change it as it is to start.
Speak to your employer or payroll manager to have the changes take effecton the next pay cycle.
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