Everybody talks about salary sacrificing and how it is a great way to reduce your tax. But what is it? And does it actually work?
Under a salary sacrifice arrangement, you agree to forego a portion of your gross salary in return for non-cash benefits of a similar value. As a result, you only pay tax on your reduced salary, but you physically receive the reduced salary plus the benefits.
The first thing to consider before jumping straight into a salary sacrifice arrangement, is that you are often comparing your total after-tax benefit, which will include the non-cash benefits that you salary sacrifice. Therefore, your actual cash in hand will usually reduce and you will only be better off if you would have paid for the benefit yourself anyhow.
Secondly, your employer will aim to be in a cost neutral position regardless of whether you salary sacrifice or not, so they will generally recoup any additional costs that they incur as a result of the arrangement. The most common cost that would be applicable to your employer is Fringe Benefits Tax (FBT).
In order to reduce FBT payable by your employer (and usually on charged to you), it is best to only sacrifice items that are specifically exempt from FBT, such as work-related expenses or superannuation.
Types of benefits that can be salary sacrificed:
Although there are a vast array of items or services that can be salary sacrificed, it is important to determine which benefits offer the best tax position after your employer has recovered the associated costs.
Any salary sacrificed item that results in a higher after-tax pay, is known as an effective salary sacrifice arrangement.
Below are common items that are effectively salary sacrificed:
- Work-related items, such as:
- Portable electronic devices (mobile phone/tablet)
- Protective clothing
- Tools of trade
- Work-related training (e.g. courses)
- Motor vehicles (often via novated leases)
Requirements for an effective salary sacrifice arrangement:
In order for a salary sacrifice arrangement to be implemented, the following conditions have to be satisfied:
- The arrangement needs to be in place before you perform the relevant work;
- There needs to be an agreement between yourself and your employer; and
- There cannot be any future access to the salary that is sacrificed.
Salary sacrifice arrangements can often be a rather tricky topic to get your head around.
If you have any questions about salary sacrificing, please contact RSM for advice specific to your situation: firstname.lastname@example.org.