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A salary sacrifice arrangement refers to an arrangement between an employer and employee whereby the employee agrees to forego part of their future salary or wage in return for some other form of non-cash benefits of equivalent cost to the employer. The Australian Taxation Office (ATO) treats 'effective salary sacrificing arrangements' and 'ineffective salary sacrificing arrangements' differently. To be an effective salary sacrifice arrangement, it must: Under an effective salary sacrifice arrangement: Payroll tax applies to an effective salary sacrifice arrangement as follows: Under an ineffective salary sacrifice arrangement, the amount sacrificed is treated as salary or wages and payroll tax is payable on the total wage or salary. If the benefit provided is exempt from fringe benefits tax (FBT), such as a laptop that is provided primarily for work purposes, no payroll tax is payable in respect of the amount sacrificed for that benefit. Payroll tax is payable only on a reduced salary on which the employee pays income tax. Some employees agree to make regular donations to charitable organisations of their choice under a workplace giving program. This arrangement is not a salary sacrifice arrangement because the ATO requires the normal gross salary to be stated on the employee’s payment summary. Payroll tax is payable on the normal gross salary. Andrew’s salary is $70,000 per annum. He negotiates a salary sacrifice arrangement for a car under a novated lease arrangement. Andrew’s new salary is reduced to $58,000 per annum. If, for example, the taxable value grossed-up by the type 2 factor of the car for FBT purposes is $6350, payroll tax is payable on $64,350 (i.e. $58,000 + $6350). Note: The example above is for payroll tax illustration purposes only. For current gross-up rates, contact the Australian Taxation Office.
Beth’s salary is $65,000 per annum. She negotiates a salary sacrifice arrangement for a $3000 laptop provided for work purposes. Beth’s new salary is reduced to $62,000 per annum. The laptop is exempt from FBT. Therefore, payroll tax is payable on the $62,000 salary.
Carol’s salary is $60,000 per annum. She also makes after-tax (personal) super contributions of $5400 per annum. Carol negotiates to replace the after-tax super contributions with salary sacrifice (pre-tax) contributions. Carol’s salary for the next financial year is therefore reduced to $54,600 and her employer will make a pre-tax super contribution of $5400. Payroll tax is payable on $60,000 (i.e. salary of $54,600 plus employer super contribution of $5400). Last modified: 3 June 2022
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Salary sacrifice is also commonly referred to as a salary packaging, or total remuneration packaging. It’s an arrangement between an employer and employee, where the employee agrees to forego part of their future salary or wage in return for some other form of non-cash benefits of equivalent cost to the employer. Non-cash benefits provided can include:
An effective salary sacrifice arrangement must:
Under an effective salary sacrifice arrangement:
The payroll tax treatment of an effective salary sacrifice arrangement is:
For more information, read our common errors page. Examples of effective salary sacrifice arrangements and how payroll tax appliesFringe benefits (motor vehicle)An employee’s current salary is $80,000 per annum. The employee and employer negotiate a salary sacrifice arrangement for a car under a novated lease arrangement. As a result, the employee’s taxable salary is reduced to $68,000 per annum. The taxable value grossed-up by the type 2 factor of the car for FBT purposes is $5,250. Payroll tax is payable on the $68,000 salary and the FBT taxable value of $5,250. Exempt benefits (laptop)An employee’s current salary is $70,000 per annum. The employee and employer negotiate a salary sacrifice arrangement for a $3,000 laptop for work purposes. As a result, the employee’s salary is reduced to $67,000 per annum. As the laptop is exempt from FBT, the payroll tax is payable only on the $67,000 salary. Pre-tax superannuation contributionsAn employee’s current salary is $60,000 per annum. The employee makes after-tax (personal) superannuation contributions of $5,200 per annum. The employee and employer negotiate to replace the after-tax superannuation with salary sacrifice (pre-tax) contributions. As a result, the employee’s salary is reduced to $54,800 and the employer will make a pre-tax superannuation contribution of $5,200. Payroll tax is payable on $60,000 ($54,800 salary plus the pre-tax superannuation contribution of $5,200). Payroll tax assistUse payroll tax assist to help you meet your payroll tax obligations. It'll show you what wages are taxable.
Income tax
Sacrificing part of your salary can reduce your tax 1 minute
Salary packaging is when you and your employer 'package' your salary into income and benefits. It's also known as salary sacrifice. Salary packaging is when you arrange to receive less income after tax, in return for your employer paying for benefits out of your pre-tax salary. The benefits could be things like a car or a phone. For example, you might package a salary of $100,000 so that you receive:
This reduces your taxable income to $85,000. You can benefit as you may pay less income tax. You need to arrange your salary package before you get paid. You can't package your salary after you've earned it. Salary packaging is usually more effective for people on middle to high incomes. You may want to get professional tax advice to work out if salary packaging is right for you. For more details about salary packaging, see salary sacrifice arrangements for employees on the Australian Taxation Office (ATO) website. What you can salary packageYou can salary package benefits you would normally pay for with your after-tax income, such as computers, cars, child care or super. But it depends on what your employer offers and you may have to pay tax. Most employers will offer salary sacrifice for super to all employees, but may restrict who can package other benefits. Benefits fall into three categories: fringe benefits, exempt benefits and super. Fringe benefitsFringe benefits can include:
Your employer pays fringe benefit tax (FBT) on these benefits. See fringe benefits tax on the ATO website for more information. Exempt benefitsExempt benefits include:
Your employer will not have to pay fringe benefits tax on these. SuperPutting some of your pre-tax income into super has benefits for you and your employer. Your super fund will tax these contributions at 15% — the same as your employer's contributions. For most people this will be lower than their marginal tax rate. See salary sacrifice and personal super contributions for more information on how this can benefit you.
Not-for-profit organisations have an FBT exemption. This means they provide fringe benefits for their employees without having to pay tax on those benefits. |