Salary Sacrificing in Australia: What You Need to Know

Ever wished you could stretch your pay a little further? Salary sacrificing – sometimes called salary packaging – is one way Australians can do just that. It’s not a magic trick, but rather a tax-smart arrangement between you and your employer. Let’s break down how it works, what you can use it for, and the pros and cons so you can decide if it’s right for you.

What is Salary Sacrificing?

In simple terms, salary sacrificing means giving up part of your pay before it ever hits your bank account. Instead, your employer uses that amount to pay for certain benefits on your behalf. Because the money is taken out before tax, your taxable income goes down – which can leave you paying less tax overall.

Think of it this way: instead of getting $100 in your pocket, being taxed, and then buying something, you arrange for your employer to pay for it directly with untaxed dollars. That way, your money stretches further.

How Does It Work?

Here’s an example: You earn $90,000 a year. You decide to salary sacrifice $10,000 into your super fund. For tax purposes, the ATO only sees you as earning $80,000. That $10,000 goes into your super account and is taxed at 15% instead of your higher marginal tax rate.

The arrangement has to be set up in advance, and it needs to be in writing. You can’t salary sacrifice money you’ve already received in past pays – it only applies to future income. Most employers will handle the payroll adjustments once you’ve signed an agreement.

What Can You Salary Sacrifice?

The options depend on your workplace, but here are some common choices:

• Superannuation: By far the most popular option. Extra contributions into your super can grow into a much bigger retirement nest egg, thanks to lower tax rates and compound growth over time.

• Cars (Novated Leases): You can bundle car finance and running costs (fuel, rego, insurance, servicing) into one pre-tax deduction. It’s convenient, but you’ll need to be comfortable with lease terms and any balloon payments at the end.

• Work Tools and Tech: Laptops, tablets, or smartphones used mainly for your job may be eligible. These are often exempt from fringe benefits tax, making them attractive if your employer offers them.

• Other Options: Depending on your industry, you might be able to package professional development, childcare costs, or even living expenses. Charities, hospitals and not-for-profits often have broader options because of special tax concessions.

How to Set It Up

If you’re interested, your first stop is HR or payroll. Ask:

• What benefits are available?

• Are there admin fees involved?

• How much can I sacrifice without impacting my day-to-day living costs?

• Can the arrangement be adjusted or stopped later?

Once agreed, your employer will adjust your pay. It’s a good idea to check your payslip regularly to make sure everything’s being reported correctly.

The Upsides

• Tax savings: Less taxable income means a smaller tax bill.

• Boosted super: Putting pre-tax dollars into super helps you grow long-term wealth.

• Lifestyle perks: Things like a car or laptop may cost you less overall.

• Extra advantages in some jobs: Employees in health, education or charity sectors often get bigger benefits thanks to FBT exemptions.

• Built-in discipline: By locking money away before it reaches your account, you’re more likely to stick to savings goals.

The Downsides

• Smaller take-home pay: You’ll have less cash in your pocket each payday, so budgeting is key.

• Less flexibility: Money in super can’t be touched until retirement, and car leases are long-term commitments.

• Impacts on benefits: Centrelink payments, Family Tax Benefit and HECS/HELP repayments are calculated on “adjusted” income that adds back sacrificed amounts. So sacrificing won’t reduce those obligations.

• No double-dipping: You can’t also claim a tax deduction for something you’ve packaged.

• Possible costs: Some arrangements have admin fees or hidden costs that reduce the value.

• Borrowing capacity: A lower taxable income can sometimes make it harder to get a mortgage or loan approved.

Tips Before You Jump In

1. Know your why. Decide if your goal is saving tax, boosting super, or paying for a big expense.

2. Crunch the numbers. Use a calculator or ask a financial adviser to check that you’ll actually come out ahead.

3. Don’t overcommit. Make sure your remaining pay covers your bills and a bit extra for surprises.

4. Stick to the rules. Be mindful of super contribution caps and employer limits.

5. Review regularly. Your circumstances may change – so should your arrangement.

6. Be practical. Only package things you’d actually buy anyway. Don’t upgrade to a flash car or expensive gadget just to save a bit of tax.

Final Thoughts

Salary sacrificing isn’t complicated once you understand the basics. Done wisely, it can save you tax, build your retirement savings, and make certain expenses more affordable. But it’s not a free lunch – there are rules, limits, and trade-offs to consider.

If you’re curious, chat with your employer about what’s on offer and, if needed, get professional advice. With the right setup, salary sacrificing can be a handy tool to help you make the most of your hard-earned income.