What is salary packaging and does it benefit me?

salary-packagingSalary packaging, also known as salary sacrificing, is a unique way for employees to afford certain purchases by exchanging part of their cash wages for an item of equal value, for example a car or laptop. Salary packaging is approved by the ATO (Australian Taxation Office) and there can be substantial tax benefits and savings for those who choose this option.

What is it?

This system involves purchasing an item using your income that has not yet been taxed as opposed to post-tax. Such an arrangement is typically set up through the employer who will take away this portion of your salary before you receive the rest, leaving you with a smaller total amount of taxable income when you receive the rest of your wages. This allows you to pay for items directly from your salary before tax and saves you money in the long-run.

So say, for example, that you earned $48,000 per year and you needed to buy a new laptop, using salary packaging the money for the laptop, $1,000, would be removed from your total salary before it is taxed saving you money.

The costs that can be packaged are varied and depend on the individual employer but some common major expenses that qualify for salary packaging include mortgage repayments and rent, holidays, computers and mobile phones. Cars are also frequently salary sacrificed, both the financial payments for the vehicle itself as well as the costs of running it.

Benefits

There are two major benefits for an employee if they choose to package their salary. One is that employees can choose to invest the salary sacrifice in superannuation. Choosing this option will mean that any contribution made to a superfund through this method will be exempt from Fringe Benefit Tax as the investment is made from pre-tax money and therefore it isn’t subject to income tax.  This means that, put simply, you will get more superfund for less money.

A second benefit for employees choosing to salary package is the Fringe Benefit. This is a ‘payment’ given to the employee, separate from their wages, that is not provided in cash, but in the form of a service or a special privilege. These Fringe Benefits are varied and examples include school or childcare fees or the use of a vehicle to travel to work or for private use.

Disadvantages

Despite these benefits, there are some important things to bear in mind when considering salary packaging. Fringe benefits paid for using salary sacrificing may be subject to Fringe Benefit Tax, although there is a range of exceptions included for employees of not-for-profit organisations and public hospitals.

If you consider sacrificing your salary for purposes relating to superannuation, this could potentially involve certain surcharges that you should be aware of. The salary packaging contributions to your fund will be taxed at 15% and could be taxed up to 16.5% when withdrawn. The typical 9% rate of employer contribution to your superfund could be reduced when you choose the salary sacrifice option.

The information in this article does not constitute legal or financial advice. If you would like to discuss any of the above in greater detail, please contact your local Axis adviser.

Image Credit: treewoman8

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