Salary sacrifice is one very efficient way of reducing your tax bill.
In simple terms, salary sacrifice allows you to spend a proportion of your pre-tax salary. In this way, you lower your official income — or ‘sacrifice it’ — and reduce your taxable income. This will reduce your tax liability, potentially even dropping you into a lower tax bracket.
So, for an example… Let’s say an employee is earning $100,000 and buys a new car for $22,000. The cost of the car is deducted from the pre-salary income, leaving the employee with — officially — an income of just $78,000. As a result, the employee finds him/herself in a lower tax bracket, and benefits from a tax-free vehicle. In exchange, they receive a reduced monthly salary for a period of 12 months.
There are different types of salary sacrifice, and not all products and services can be bought in this way. In each case though, you receive income and benefits by agreeing to take some of your remuneration in the form of taxed benefits.
Go online to search accountants in Sydney before entering into any arrangements.
Talk to your employer
The arrangement is made between the employee and the employer, and different employers will agree to different forms of salary sacrifice.
Salary sacrifice arrangements are often considered by employers to be a useful employee perk, attracting personnel and increasing productivity. There are potential costs for administrating the arrangements though, which discourage some employers from taking part.
The best option to begin with is to talk to your own employer and see if this is something they offer. The agreement will need to be written up and signed before you start work. Agreements which arrive later may be less effective, and verbal agreements are risky.
The benefits fall into three categories: fringe benefits, exempt benefits and super. The fringe benefits include cars, health insurance, loans, school fees, childcare costs and other personal expenses.
The value of all reportable fringe benefits received in a financial year will be given on your payment summary. There will be no tax or Medicare levy to pay on this total.
Your non-reportable fringe benefits include entertainment and car parking, and these are not given on the financial statement.
Fringe Benefits Tax (FBT)
One factor that your employer will have to take into account is the Fringe Benefits Tax (FBT).
This tax is officially the responsibility of the employer, though inevitably they seek to pass this onto the employee. In some cases, the employer will define an agreement in which the employee must pay back the cost of the FBT from their salary.
‘Equalising’ your pre-tax and post-tax salary would of course remove some of the benefits for you. Be sure to give it some thought before you agree to this type of arrangement.
Some expenses attract FBT at the top marginal rate of tax. These include school fees, personal expenses and mortgage payments.
What is exempt from the FBT?
A variety of products and services are exempt from the Fringe Benefits Tax, mostly commonly work-related items. These include portable electronic devices, computer software, protective clothing, tools of the trade and briefcases.
For an item to be defined as ‘work-related’, it must be used primarily for work purposes.
For larger businesses, or those with a turnover of more than $10 million, an FBT exemption can only be applied if no items with an identical function have been purchased in the same year. (This doesn’t include replacements.) Multiple items with different functions can be claimed in the same year.
There are accountants in Sydney with expertise in this area—be sure to seek advice before making any arrangements with your employer.
The best way to buy a car?
Salary sacrifice is one of the best ways to buy a car. This method gives you the benefit of purchasing on finance, allowing you to effectively make payments each month, but does so in a tax efficient manner.
By sacrificing a proportion of your salary each month, you get to purchase a tax-free vehicle, ensuring your money goes further. An employee in the 32.5% tax bracket, for example, will see 32.5% more purchasing power for their money.
When reaching an arrangement with your employer, consider whether you will be expected to pay back a portion in exchange for private use of the vehicle. The FBT is affected by whether or not the car is exclusively for work use, and your employer may wish to pass any increased tax liability on to you.
The FBT liability can be further reduced by agreeing to contribute to the vehicle’s operating costs from your post-tax income.
Salary sacrifice for childcare
If your children are cared for by a professional while you work, the costs can potentially be salary sacrificed. There are certain restrictions on this, namely that the carer or nursery must be a formally registered childcare provider. They can be a private company, or provided by the local council, or even associated with your employer.
It should be noted that salary sacrificing childcare fees can affect state provision entitlements, so it is a good idea to get advice on your personal circumstances before entering into an arrangement.
FBT is payable on childcare fees, which can reduce the associated financial benefits.
Salary sacrificing into your superannuation fund
It may suit your personal circumstances to salary sacrifice into your superannuation fund.
In this way, your employer can simply redirect a proportion of your income to the super, which is then taxed at a special rate of 15%. These contributions are not subject to the Fringe Benefit Tax.
This type of salary sacrifice is potentially appealing to any employee, but particularly so for those in the higher tax brackets. Those with a 30% marginal rate will find they save 15% on every dollar that they sacrifice in this way.
A cap on concessional contributions
These sacrifices are treated as concessional contributions, as are any employer contributions made under the super guarantee.
All concessional contributions made to your superannuation funds are included in the ‘assessable income’. Contributions are aggregated where an individual has more than one fund.
There is a tax liability of 15% and concessional contributions are capped at $25,000 per year.
Should you exceed the cap, there is an Excess Concessional Contributions charge (ECC) and the excess is taxed at your marginal rate. However, the Australian Tax Office gives permission for you to withdraw up to 85% of the excess contributions—which you may then use to cover the associated charge and/or tax burden.
Talk to Cantor Accounting
Cantor Accounting is one of the best accountants in Sydney for matters of salary sacrifice and associated tax issues.
It is essential to seek advice before entering into any salary sacrifice arrangements, and Cantor Accounting are ideally placed to help. Make an appointment with a tax advisor to go through your personal circumstances and assess whether salary sacrifice is right for you.