Salary Sacrifice Explained

As an employer it’s wise to understand everything you can about payroll in Australia. Beyond mere compliance, there’s a slew of options and nuances when it comes to remunerating your employees – salary sacrifice is one of them.

What is salary sacrifice?

Salary sacrifice is a tax-effective way for employees to increase their take-home pay by using a portion of their pre-tax salary to pay for benefits or contributions, such as superannuation, cars, laptops, and other large purchases.

For employers, salary sacrifice can be part of an attractive compensation package, while employees can save on taxes and increase their superannuation savings.

How does salary sacrifice work?

The employee agrees to use (“sacrifice”) a portion of their before-tax salary to pay for eligible work-related expenses. The sacrificed amount is deducted from their gross salary before tax. These purchases lower their taxable income and therefore result in potential tax savings.

However, it is crucial to understand the tax implications and eligibility criteria to maximise the benefits of its arrangements. If you’re not sure, speak to a tax advisor.

For employers, it’s important to note that salary packaging is not compulsory. It’s up to you to set up the agreements in your contracts as an employee benefit.

For what reasons can an employee salary sacrifice?

An employee can use salary sacrifice to pay for numerous expenses usually larger single purchases or contributions. Popular choices include:

Superannuation

To boost their retirement saving, employees can choose to salary sacrifice a portion of their pay into their superannuation fund. (This is a popular option to avoid extra tax.)

A novated lease for a vehicle

By entering a novated lease arrangement, employees can opt to salary sacrifice to obtain a car, with the lease payments and associated costs paid from the sacrificed amount.

Electronic devices

Some employers offer salary sacrifice arrangements for electronic devices like laptops, smartphones, or tablets.

How does salary sacrifice affect income tax?

For your staff, one of the primary benefits of salary sacrificing is their potential tax savings: if taken up, it essentially lowers their pre-tax salary, which can lead to them paying less income tax.

The amount agreed upon is deducted from your employee’s salary before their income tax is calculated, (meaning that the sacrificed amount is not subject to income tax). This can result in increased take-home pay and a more efficient way to gain certain personal benefits.

Does salary sacrifice affect how you run your payroll and other processes?

Salary sacrifice is a benefit you can offer your employees. But offering this benefit requires some tweaking to your payroll and other processes. For example:

• You’ll have to adjust your payroll to reflect the salary sacrifice for that employee, including STP, assessable income, and employee payments.
• In the case of super, you’ll have to adjust that as well.
• This may or may not mean you’ll have to pay fringe benefits tax.

Creating effective salary sacrifice agreements

To arrange salary sacrifice options for your staff, to set up the terms and conditions, you must draft a dedicated salary sacrifice agreement. This salary sacrifice arrangement can be alluded to as part of your initial employee contract upon hiring new staff, however, you must create a specific agreement for every instance of salary sacrifice.

The salary sacrifice agreement will outline the specific benefits or contributions the employee can receive in exchange for a reduction in their gross salary, as well as how often it can be used and for what amount.

To create an effective agreement, you should:

• Ensure the employee doesn’t have access to the sacrificed funds.
• Only allow salary sacrifice for future work and pay periods, not prior.
• Make sure the agreement is in writing.

It’s best to gain financial advice around these agreements to ensure they’re accurate and compliant.

How much can your staff salary sacrifice per year?

It’s important to note that there are limits and regulations around salary sacrificing in Australia—and that these can change over time—so you need to do your research or talk to an advisor, accountant, or tax specialist.

As an example, as of 2019 the cap for salary sacrificing into super is $27,500.

Example of salary sacrificing

Let’s say your employee, Daryl, wants to buy the new iPhone outright for $2000. Instead of using his savings, he decides to salary sacrifice the amount to fund his purchase.

Daryl’s yearly pay is currently $80,000 per year. As his employer, you would pay for the laptop and his yearly salary would then be 78,000 per year and Daryl would pay income tax on the new amount.

(In this instance, the fringe benefits tax (FBT) would not be in play, and you would not have to pay the fringe benefits tax.)

What are the pros of salary sacrificing?

For employers, the pros of salary sacrificing revolve around becoming a better business to work for: by offering salary sacrifice, you can boost employee retention and satisfaction, which are important metrics for any business.

For your employees, being able to salary sacrifice delivers a few benefits, depending on how they specifically uptake:

• If used for super, your employee will have accrued a healthier balance for their retirement and put their money to work for them through the benefits of investing more in their super account as early as they can.
• If used for a purchase of any kind, your employee benefits from ‘forced savings’.
• Your employee will most likely pay less tax by reducing their taxable income, while still receiving a benefit from their current salary.

What are the cons of salary sacrifice?

As an employer, the primary downside of offering or facilitating salary sacrifice is the extra admin burden. You will not only have to draw up an agreement with your employee but will also have to adjust your payroll for the specified period of the salary sacrifice.

You’ll also have to read up on FBT and ensure the contributions made go directly to the intended recipient and are not made available to your employee. This, however, is not too onerous in the scheme of things.

As always, it’s best to seek financial advice before contributions are made or you enter into a salary sacrifice arrangement with your employees. It’s also wise to read up on this through official sources such as the ATO.