Salary sacrifice is a strategy that can reduce your taxable income and provide many tax benefits.
Salary sacrifice allows employees to use a portion of their pre-tax salary to pay for certain purchases or contributions. This popular strategy can be an effective way to raise your take-home pay and manage your finances.
In this guide, we’ll cover what salary sacrifice is, how salary sacrifice affects tax returns, what is deductible, and how to get started.
What Is Salary Sacrifice?
Understanding Salary Sacrifice
Many of our clients ask, “What is salary sacrifice?”. We understand it can be an overwhelming, confusing topic.
Simply put, salary sacrifice is a strategy that can reduce your taxable income. Also known as salary packaging, it is an effective way to reduce how much you pay in taxes and increase your take-home pay.
Here’s a mock scenario to demonstrate salary sacrifice in the simplest terms:
- Derek has a written salary sacrifice agreement with his employer
- Derek agrees to “sacrifice” part of his pre-tax salary to pay for eligible expenses
- The amount of salary sacrificed is deducted from Derek’s gross income
- Derek’s taxable income is reduced, saving him money
How Does Salary Sacrifice Work?
Salary sacrificing, also known as salary packaging, allows you to use part of your pre-tax salary to pay for contributions or benefits. These could be large purchases, laptops, cars, or contributions to your superannuation.
As an example, pretend you earn $100,000 before taxes in a financial year. You and your employer agree on a written salary sacrifice arrangement that allows you to receive $25,000 pre-tax to purchase a car. This reduces your taxable income to $75,000.
We often recommend this helpful resource on salary sacrifice from the ATO: Salary sacrificing for employees.
Common Types of Salary Sacrifice Benefits
Common salary packaging items include:
- Contributions to superannuation
- Car fringe benefits (i.e. a Novated lease for a vehicle)
- Certain electronic devices, such as tablets, smartphones, and laptops
- Expense payment fringe benefits
- Allowances for living away from home
- Car parking fringe benefits
Does Salary Sacrifice Affect Your Tax Return?
How Salary Sacrifice Impacts Your Taxable Income
Here are salary sacrifice examples to help demonstrate how salary sacrifice affects your taxable income:
Salary Sacrifice Example #1:
- Name: Kevin
- Income Before Taxes: $90,000
- Purchase or Contribution: New iPhone for $2,000
- Result: Taxable income is reduced to $88,000, reducing how much Kevin owes in taxes
Here’s another example of salary sacrifice:
- Name: Jill
- Income Before Taxes: $80,000
- Purchase or Contribution: $10,000 super contribution
- Result: Taxable income is reduced to 70,000 and Jill will pay significantly less in taxes
Potential Tax Benefits of Salary Sacrifice
Tax benefits of salary sacrifice may include:
- Pay less taxes by reducing your taxable income
- Increase your take-home pay
- If you use salary sacrifice to make super contributions, you can boost your super account while saving on taxes
- May bump you into a lower tax bracket
Is Salary Sacrifice Tax Deductible?
Deductibility of Salary Sacrifice Contributions
Here’s an example of the deductibility of salary sacrifice contributions:
- You and your employer have a written salary sacrifice for your $100,000 salary
- You receive a $15,000 car benefit
- Your taxable income is reduced to $85,000
Key Factors to Consider for Tax Deductions
Before entering a salary sacrifice arrangement, we recommend considering:
- All associated costs
- The exact amount to be sacrificed
- Any applicable surcharges, such as the Medicare levy surcharge
- How the benefits will be reported on your income statement
Who Can Benefit from Salary Sacrifice?
How Salary Sacrifice Applies to Different Job Sectors
Salary sacrifice can benefit many job sectors in Australia, including:
- Mining: Mining employees who live and work in areas that the ATO classifies as remote may benefit from salary sacrifice. Remote mining employees may consider arranging a salary package for mortgage interest, costs of purchasing a home, and rent.
- Public sector: Employees in government agencies, public hospitals, and government departments may be eligible to salary sacrifice their mortgage, super payments, and car.
- Healthcare: Healthcare professionals may be eligible to receive pre-tax benefits on rent, mortgages, personal loans, and other expenses.
- Not-for-Profit Organizations: Employees at not-for-profit organisations may be able to take advantage of a range of salary packaging benefits. This can help cut costs on mortgage payments, rent, and living expenses.
- Corporate: Corporate employees can save on tax by making additional contributions to their super, salary packaging a car, and other work-related items.
How to Get Started with Salary Sacrifice
Steps to Set Up Salary Sacrifice with Your Employer
Here are the steps to setting up salary sacrifice with your employer:
- Consider seeking professional financing advice before agreeing to a salary sacrifice arrangement
- Find out what your employer and the ATO permits
- Set up the salary sacrifice arrangement – this must be in writing and mutually agreed upon
- The written arrangement must specify the terms of the salary sacrifice
- Enter the arrangement before you perform the work and before the start of the financial year
Important Considerations and Common Pitfalls to Avoid
- Employers are not required to offer salary sacrificing, so make sure it is an option for you.
- You must arrange a salary sacrifice package before getting paid. Salary sacrifice does not apply to money that has already been earned.
- Generally, salary sacrifice benefits middle to high incomes the most. Use our convenient income tax calculator to estimate your taxable income.
- Expenses paid with direct debits from your pay do not fall under salary sacrificing
- You cannot claim a tax deduction for any expense your employer pays for as part of your salary package
- We recommend seeking financial advice before entering into a salary sacrifice arrangement and researching the ATO’s rules and restrictions on salary sacrifice
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Make the Most of Your Financial Strategy
Salary sacrifice can reduce your taxable income and provide valuable tax benefits. We recommend carefully weighing the benefits and limitations of salary sacrificing and consult with a tax professional to optimise your tax return.
Ready to maximise your tax benefits with salary sacrificing? TaxReturn.com.au is here to help you navigate your options. Register with us today for expert advice, or get started with our easy online tax return services to make the most of your financial strategy!
*General Advice Warning – “Any financial advice provided by TaxReturn.com.au is general in nature and is not personal financial advice. It does not take into account your objectives, financial situation, or needs. Before acting on any information, you should consider the appropriateness of it regarding your own objectives, financial situation and needs.”
FAQs on Salary Sacrifice and Tax Returns
Does salary sacrifice reduce my taxable income?
Yes, salary sacrifice reduces taxable income.
Are there limits to what I can salary sacrifice?
Yes, there are limits to what can be salary sacrificed. Here is the maximum salary sacrifice limit according to the Australian Taxation Office: “The concessional contributions cap is the maximum amount of before-tax contributions you can contribute to your super each year without contributions being subject to extra tax. From 1 July 2024, the concessional contributions cap is $30,000.”
It is also important to be aware of specific restrictions your employer has regarding salary sacrificing.
Can I salary sacrifice into superannuation?
Yes, you can salary sacrifice into your super. This is a great strategy in two ways: It puts extra money in your super and you pay less tax on it.
Salary sacrifice contributions are classified as employer contributions. This means they are taken out of your pre-tax salary. Typically, this means they are taxed at a 15% rate when entering your super fund. There is a limit to how much you can contribute to your super at the 15% tax rate.
We recommend this resource from the ATO if you would like to learn more: Salary sacrificing super.
