- What is salary sacrifice?
Salary sacrifice is a popular tax-saving strategy in Australia that offers numerous benefits to employees. In this arrangement, an employee agrees to forego a portion of their pre-tax salary in exchange for non-cash benefits, such as a company car or additional superannuation contributions.
- Here are some of the key benefits of salary sacrificing:
Tax savings: The primary advantage of salary sacrificing is that it can reduce an individual’s taxable income. When a portion of an employee’s salary is set aside for a benefit, that amount is taxed at a lower rate or not taxed at all, leading to significant tax savings.
Boosting superannuation: Salary sacrificing into superannuation is an effective way to increase retirement savings. By contributing pre-tax dollars, employees can reduce their taxable income and increase their superannuation balance at the same time.
Improved cash flow: By reducing taxable income through salary sacrificing, employees can free up cash that would have otherwise gone towards taxes. This can be particularly helpful for individuals who are trying to save for a specific goal or who are struggling to make ends meet.
Non-cash benefits: Salary sacrificing can be used to pay for non-cash benefits, such as a company car or additional leave, which can improve an individual’s overall financial position.
Flexibility: Salary sacrificing arrangements are flexible and can be tailored to meet the specific needs of an employee. For example, an individual may choose to sacrifice a portion of their salary into superannuation one year, and then into a company car the next year.
- Which benefits from an employer I can include salary sacrifice?
> Superannuation
> Mobile phones, laptops and other technology
> Company cars (novated lease)
> Gym Memberships
> Work Related Training
> Employer Pension Contributions
>> Examples of Effective Salary Sacrificing:
Example 1:
James and Tim both work together as mechanics. They both earn $100,000 per annum. James decides to salary sacrifice an additional $15,000 for his superannuation fund. Tina does not have a salary sacrifice arrangement in place.
| Name | Income | Salary Sacrifice | Taxable Income | Income Tax | Income tax additional contribution (15%) |
| James | $100,000 | $15000 | $85,000 | $18,092 | $2,250 |
| Tina | $100,000 | $0 | $100,000 | $22,967 | $0 |
James total tax = $20,342
Tina total tax = $22,967 James has reduced his income tax liability by $2,625
Example 2:
Sarah and Michael are both doctors. They both earn $150,000 per annum. Sarah decides to salary sacrifice an additional 10,000 into her superannuation fund and has agreed with her employer to purchase a vehicle through a Novated Lease. The novated lease has an annual repayment amount of $18,000. Michael does not have a salary sacrifice arrangement with his employer, however, he did purchase a car through a chattel mortgage. The car is 100% for private use.
| Name | Income | Salary Sacrifice | Taxable Income | Income Tax | Income tax on additional contribution (15%) |
| Sarah | $150,000 | $28,000 | $122,000 | $30,000 | $1,500 |
| Michael | $150,000 | $0 | $150,000 | $40,567 | $0 |
Sarah’s income tax = $31,500
Michael’s income tax = $40,567
Sarah has reduced her income tax liability by $9,067.
Regarding the example above, please note the following:
Sarah’s novated lease will result in fringe benefits tax for the employer. Commonly, employers asked to be reimbursed for the private portion of the costs related to the benefit. This needs to be considered when calculating the actual tax benefit.
In conclusion, salary sacrificing is a useful tax-saving strategy that offers numerous benefits to employees. By reducing taxable income, boosting superannuation, and improving cash flow, salary sacrificing can help individuals achieve their financial goals and improve their overall financial position. Before entering into a salary sacrificing arrangement, however, it is important to consult with a financial advisor or tax professional to ensure that it is the right choice for your individual circumstances.
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