What is a salary sacrifice/salary packaging arrangement?

A salary sacrifice (or salary packaging) arrangement is an arrangement between the employer and the employee, where the employee agrees to forego part of their future entitlement to salary or wages in return for the employer providing benefits of a similar cost to the employer. The employee is likely to place greater value on the benefit than its cost to the employer.

Under an effective arrangement:

• the employee pays income tax on the reduced salary or wages
• the employer may be liable to pay FBT on the fringe benefits provided, and
• salary-sacrificed superannuation contributions are classified as employer superannuation contributions (not employee contributions) and are taxed in the superannuation fund under tax laws dealing specifically with this subject.

Your employer can advise you if they allow Salary Sacrifice for their employees.

What are the implications for employees?

Assessable income:
The employee pays income tax only on the reduced salary and the employee receives a reduced salary plus non-cash benefits. Sometimes, employees also make employee contributions out of their after-tax income towards the cost of providing the benefit.

FBT
If there is any FBT payable on the benefits received then it is the employer who is liable to pay that tax. The FBT payable is determined at the highest marginal income tax rate – that is, 48.5 cents in the dollar. The employer, however, may ask the employee to contribute the FBT payable.

Henderson Matusch can assist you to determine if this strategy will work for you.