Increase your net disposable income through salary packaging
10.11.2006
A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. It is an arrangement between you and your employer, where you agree to forego part of your salary or wages in return for your employer (or someone associated with your employer) providing benefits of a similar value.
An effective salary sacrifice arrangement is an arrangement between you and your employer detailing the amount of salary or wages income to be sacrificed. It is advisable that you and your employer clearly state and agree upon all the terms of your salary sacrifice arrangement and should be entered into before the work is performed. The ATO may deem the salary sacrifice arrangement ineffective if the arrangement is put into place after the work has been performed.
All non-cash benefits can be sacrificed. Generally, the principle benefits are cars (providing greatest advantages for employees on a high marginal tax rate who use there vehicle for work purposes), Fringe Benefits Tax (FBT)-exempt laptop computers and FBT-exempt superannuation contributions. The important thing is that these benefits form part of your remuneration, replacing what otherwise could have been paid as salary. If there is any FBT payable on the benefits received it is your employer who is liable to pay that tax. Your employer may ask you to contribute to the FBT payable which can form part of the salary sacrifice amount.
The abolition of the superannuation contributions surcharge from 1 July 2005 and the splitting of superannuation contributions with a spouse from 1 January 2006 may provide further incentives for high income earners to contribute more to their retirement savings by means of salary sacrifice. The recent changes to superannuation announced in the 2006 Federal Budget may also make salary sacrificing into superannuation an effective tax planning tool for those coming up to retirement. Taxable superannuation contributions are taxed at a rate of 15% as compared to the highest individual tax rate of 46.5% (Including Medicare Levy).
As a result of salary packaging, the cost of the benefit provided to you as the employee is less than if you used after-tax salary to obtain the same benefit. This means more money in your pocket.
Example – Salary sacrifice
Jim works as a sales manager and receives an annual salary of $80,000. He wants to enter into a salary sacrifice arrangement and lease a $35,000 car. He expects that he will travel between 25,000 kms and 40,000 kms for the 2006-2007 FBT income year. Car expenses of $11,500 are also based on a leasing arrangement. Jim will also salary sacrifice an additional $5,000 into superannuation. Jim’s employer calculates that he will need to sacrifice $20,350 if no employee contributions are made.
Using the above figures, the following table illustrates how salary sacrificing works by comparing the net disposable income for each scenario. It shows the different outcomes for Jim where there is no salary sacrifice arrangement and where a salary sacrifice arrangement is entered into without employee contributions.
| Salary only | Salary + car + Super |
Annual remuneration | $80,00 | $80,000 |
Less salary sacrifice amount (SSA) Motor Vehicle (Including FBT) |
$ NIL |
$15,350 |
Taxable income | $80,000 | $59,650 |
Less tax | $19,850 | $13,245 |
Less 1.5% Medicare | $1,200 | $895 |
Income after tax and SSA | $58,950 | $45,510 |
Less car expenses | $11,500 | $ NIL |
Less superannuation | $5,000 | $ NIL |
Net disposable income | $42,450 | $45,510 |
Reportable fringe benefits amount for employee payment summary | $ NIL | $ 7,949 |
*Tax payable by superannuation fund at 15% = $750
The above example illustrates how salary packaging can work. It is not intended to be advice. Each individual is different and should seek specific advice in each case.
To find out more about how you can benefit from salary packaging, please feel free to contact the team at Kensington Partners on (08) 9328 1799 or email us.