
Salary packing, also known as salary sacrificing, is a financial arrangement in Australia between an employee who agrees to an employer to have some of their income given in non-cash benefits instead of cash. This can include superannuation, automobiles, and other work related costs. Because it offers a range of tax advantages, salary packaging is popular among many Australians, especially those working for not-for-profit (NFP) companies, government agencies, and big businesses.
In this article, we will explore what salary packaging is, its benefits, how it works within the Australian tax system, and its common components.
What is Salary Packaging?
Salary packaging is an arrangement where an employee chooses to sacrifice a portion of their salary in exchange for non-cash benefits. These benefits can include work-related items such as:
- Cars (through novated leases)
- Help with health insurance and pension saving
- Technical instruments
- Daycare facilities
- Expenses usually linked to work include clothes and tools.
Usually taxed at a lower rate than regular income, employees essentially “sacrifice” some of their pay for these perks. This could lead to either more take-home pay or savings on specific bills.
How Does Salary Packaging Work?
Salary packaging works by rearranging the structure of your income. Some of your income is put toward the benefits you select rather than cash. Your regular pay is not taxed at the same rate as the pay you skip, which helps to lower your overall taxable income.
Let’s break it down step by step;
- Employee Agreement: Exchange non-cash perks for a specific pay amount agreed upon by the employee and company that would be lost every pay cycle.
- Non-cash benefits: Usually sponsored by the company or a third party, non-cash incentives are then given to staff members.
- Tax implication: Workers do not pay income tax on the percentage of their salary sacrificed. Conversely, depending on the benefit, it can be taxed at a reduced rate.
For example; Should you choose to pay for a car, the money you remove from your pay goes toward other related fees or auto payments. This is good since salary sacrifice is not taxed at the same rate as regular pay.
Common Salary Packing Objects
Depending on their company’s policy and what the Australian Taxation Office (ATO) permits, Australian employees have many choices for how they pay their remuneration package. Workers could incorporate these basic products into their pay-roll packaging:
1. Novated lease (Cars)
Among the most often used pay-back packaging systems are novated leases. Through their firm, employees can lease an automobile; pre-tax pay covers the expense. This lowers their taxable income, enabling them to pay for a car before taxes are deducted, so perhaps saving money.
2. Superannuation contributions
Employees can fund their superannuation account a proportion of their pay. Staff members gain from a smaller taxable income since these donations are paid before taxes. Moreover, donations are taxed at a reduced rate, usually 15%, instead of the marginal tax rate of the employee.
3. Electronic device
Some companies let workers pay for phones, tablets, and computers using their pay package. Apart from providing tax advantages, this can help to lower employee upfront costs.
4. Health insurance
Some companies provide health insurance bundles as payback for lowered wages. Paying premiums for employees lowers their taxable income and provides the ease of having their health insurance taken straight from their pay.
5. Childcare services
Some companies now offer wage package choices for daycare providers whereby staff members may donate some of their pay to assist with costs.
Benefits of Salary Packaging
There are many advantages for workers from salary packaging. The following are some quite important benefits:
1. Tax savings
Regarding possible tax savings, salary packing offers one of the most important advantages. Reducing your taxable income could let you pay less tax generally. Higher tax bracket employees significantly benefit from this.
If your pay includes a $10,000 automobile lease, for instance, your taxable income will be less than $10,000. Should your tax bracket fall into the 32.5% range, you may save $3,250.
2. Increased take-home pay
Your taxable income drops, which lowers your income tax bill and increases the savings. Your net pay, that is, “take-home” pay may rise even if your gross pay stays the same.
3. Access to Discounts
Salary packaging lets staff members get discounts on designated products and services. If your wage package includes a car, for instance, you might get discounts on insurance, gas, and auto maintenance.
4. Simplified payments
Salary packaging lets workers directly pay some expenses, including auto leases or health insurance premiums, from their pre-tax income. Employees who cut the necessity to pay these bills from after-tax income can better control their budgets.
Drawback of Salary Packaging
While salary packing offers some benefits, it is equally crucial to weigh the possible negatives.
1. Complicating factors
Salary packaging can be complicated; policies vary according to the company, benefits selected, and employee personal financial status. Knowing how pay packing operates is vital; if necessary, see a specialist.
2. Restrict on benefits
There are numerous techniques to regulate the amount of money one can forego in order for particular benefits. Your tax savings are impacted, for instance, by the ATO’s restriction on the maximum salary package for automobiles.
3. Impact on Extra Advantages
Other elements of your financial life, like your eligibility for some government subsidies or loans, may be affected by salary packaging. Lenders may take your earnings after packaging into account when computing your borrowing capacity, therefore affecting the amount you could be able to borrow for an auto loan or a house loan.
4. Potential Fringe Benefits Tax (FBT)
On some benefits given to employees, employers could be obliged to pay Fringe Benefits Tax (FBT). Although the FBT is usually passed on to the employee, it is important to note that not all benefits are free from this tax, therefore lowering the total advantages of salary packaging.
Who Can Benefit From the Salary Packaging?
Strategies for salary packaging help some employee groups more than others, including:
1. Employees in high tax brackets: Workers falling into higher tax bands Higher earners can possibly save more in taxes by means of salary packaging.
2. Employees in the not-for-profit (NFP) sector: Those working in the non-profit (NFP) sector Many NFPs provide high pay packing incentives covering a wider spectrum of expenses.
3. Government staff members: Public sector workers occasionally have choices for pay packages including cars, superannuation, and other work-related expenses.
4. Employees who drive for work: Those who drive for business can gain by leasing their car or from routinely packaged running expenses like gasoline.
Conclusion
Employees who wish to lower their taxable income, save money on taxes, and get access to other benefits should pack their salaries. Though it offers great financial advantages, it’s important to be aware of Australian Taxation Office rules and regulations as well as make sure the pay package fits your particular financial situation.