Salary sacrificing is a great way for employers to offer benefits to their employees in a tax-efficient manner. In essence, you buy benefits in pre-tax dollars so if the tax rate is 32.5%, you get 32.5% better buying power.
The most common form of salary sacrificing is for car fringe benefits (novated lease), expense payment fringe benefits, living away from home benefits, car parking fringe benefits, and superannuation. Interested in learning more about salary sacrificing and how beneficial it can be to employees? Find out why more employers are working with their payroll provider to offer these tangible benefits.
What Is Salary Sacrificing?
Salary sacrifice arrangements (also known as salary packaging or total remuneration packages) is an agreement between an employer and employee whereby the employee agrees to a reduced salary in exchange for benefits of the same value.
Professional schemes can be used in several ways. Salary sacrificing for a car or laptop is popular amongst employers, as is salary sacrificing into super (an organised pension programme that is agreed upon by a company and one or several employees.)
In this guide, we will attempt to answer the two most common questions asked by businesses and employees when deciding if a salary sacrifice is the right option for them.
What Is Salary Sacrificing into Super?
The form of superannuation most people are aware of is a retirement savings scheme provided by your employer that helps employees retire comfortably. Under the Superannuation Guarantee (Administration Act) employers are legally obliged to pay contributions into a super account chosen by the employee on top of an employee’s base salary if they are over 18 years of age and are earning $450 or more before tax every month.
Salary sacrificing agreements work a little differently, as they are optional and at the discretion of the employee, rather than the standard mandatory 9.5% contribution employers are obligated to pay. These payments are still classified as employer super contributions and are taxed with a cap of 15%.
How Does Superannuation Work?
Superannuation is one way that Australians can save money for their retirements. At a base level, employers agree to pay 9.5% of an employee’s salary into a super fund through the Superannuation Guarantee (on top of their agreed wage). However, agreements can be made in which additional money is placed in superannuation from the wages of an employee. This is what is known as salary sacrificing.
The money deposited is then invested and the growth reinvested to help increase the balance. After years of consistent sacrificing, the accumulated total can then be used to help support an employee’s lifestyle in retirement, rather than solely relying on a pension.
The Australian Government’s superannuation scheme is intended to help people consistently save money and provide them with a better income in retirement.
What Are Employers Responsible For?
Employers are required to pay SG contributions to a super fund at least four times a year, by quarterly due dates. OT (ordinary time) earnings must be used to calculate the employee percentage contribution.
When it comes to super, all employers must have a nominated default superannuation fund available for their employees. Default funds can differ between employers. Employers must provide employees with a choice to select their own fund or use the employer’s default fund to deposit the percentage of their salary into.
This must be done either:
· Within 28 days of starting a new job.
· Within 28 days of receiving notice that the super fund receiving SG compensations has become ineligible to receive them.
· Within 28 days of your employer switching their default fund if an employees’ SG contributions are currently being paid into this fund.
What Is Salary Sacrificing a Car?
Using a novated lease, employees can have their car payments deducted from their gross salary by an employer and then paid into a third-party financing company. One of the great benefits to this is that lease payments, including petrol and servicing costs, can be deducted, meaning that employees won’t have to pay any other car ownership bills.
Once the lease term expires, employees can purchase the car or start a new lease with a new car. Novated leases are available for between one and five years and are for both new and used vehicles.
The Benefits to Salary Sacrificing a Car
There are many benefits to salary sacrificing a car as a finance option. These are listed below:
· Reduce income tax liability – employees who make payments from their pre-tax salary can reduce the amount of tax they’re liable for.
· Avoid GST on new vehicles – vehicles purchased through a novated lease scheme can be GST-free, meaning that the cost won’t be passed on through lease payments.
· GST maintenance – employers can claim an Input Tax Credit, making operational costs GST-free.
· Fixed repayment costs – a novated lease allows employees to make one single payment from their pre-tax income making it simpler and easier to budget for.
· No expensive deposits upfront – salary sacrificing avoids any upfront payments because lease payments are made over a period.
· Petrol and servicing costs paid – novated lease agreements are based on an estimated annual kilometre allowance and it covers all petrol and servicing costs, provided that the allowance isn’t exceeded.
What Is Employee Contribution?
The Employee Contribution Method (ECM) allows you to pay certain costs from your post-tax income, instead of sacrificing your salary. This can help with the running costs of the car.
Anyone who receives a fringe benefit, such as a car, there are always tax consequences. An employer must pay Fringe Benefits Tax on the amount of benefit you receive, which they generally deduct from an employees’ wages. Using the ECM, employers effectively offset the amount of fringe benefit that employees receive and are required to pay tax on.
The Fringe Benefits Tax rate is currently 49%. Most people would benefit from offsetting this with their post-tax income which will likely have been taxed at a lower rate.
What’s Right for Your Business?
At the end of the day, salary sacrificing is a great way to help employees build a nest egg or live to their budget. It’s also an excellent way for employees to take more control in regards to their super, allowing them to plan for their futures in a way that makes sense for their needs.
Interested in learning more about salary sacrificing? Check out our other resources below:
Contact i3Group today to explore your options and understand what entitlements you could be offering employees when partnering with a salary packaging provider.