Keen for a new laptop or car? Sick of putting your hand in your pocket to pay off your mortgage? All of these things could potentially be paid for through a salary sacrifice arrangement.
With the majority of a fresh financial year ahead of you, now is a good time to look at getting the most from your pre-tax earnings.
What is salary sacrificing?
Salary sacrificing, also known as salary packaging, involves you and your employer making an arrangement where they pay for goods and services out of your pre-tax salary.
As a result, you can reduce your taxable income and boost your disposable income.
What can you sacrifice?
It all depends on your employer and the industry you work in but there are three broad categories of things that can be packaged: those that attract fringe benefits tax (FBT), those which do not, and superannuation.
– Fringe benefits
Firstly, let’s clarify that when we say that these items attract FBT, it’s your employer who has to pay the tax, not you.
That can make offering these benefits less attractive for employers, although many will use the benefits as a great recruitment and retention tool.
Common fringe benefits include health insurance, car loans and novated leases, school fees and childcare fees.
It’s also possible – depending on your industry and employer – to use a salary sacrifice arrangement for home mortgage repayments, income protection insurance, disability insurance, relocation expenses and even car parking and holiday accommodation.
– Exempt benefits
These are things your employer doesn’t have to pay tax on. They commonly include work-related items such as portable electronic devices, computer software, protective clothing, tools of the trade and briefcases.
You may also be able to salary sacrifice for work-related travel expenses (domestic or international), self-education expenses, professional memberships and subscriptions, home office expenses and airport lounge membership.
You’re probably well aware that most employers will let you salary sacrifice into superannuation.
Doing so can boost your retirement nest egg in a tax effective way – you’ll pay just 15% tax on salary sacrificed into superannuation, rather than the marginal tax rate of up to 47%.
To get the most out of the arrangement, however, it’s important to look closely at the fine print.
That’s because, unless otherwise agreed, salary sacrificed super contributions are classified as employer super contributions, which means your employer can pay you less in super guarantee contributions.
It’s also important to ensure that you don’t go over the concessional (before tax) contributions cap and that your income doesn’t trigger Division 293 tax.
As with anything in life, there are pros and cons, swings and roundabouts.
Salary sacrificing is no different.
Before making any big decisions, make sure you get proper advice from your an appropriate financial services professional you’d like to find out how to get the most from your pre-tax (and after-tax!) earnings, please get in touch today.
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