Salary Sacrificing (also known as salary packaging) can be a massive boost to your end-of-tax-year earnings by reducing how much you bring home each week, but is it right for you? Here are some of the pros and cons of salary sacrificing, to help you reach the right decision.
It is important to note here that this article contains general information only and should not be relied on as financial advice. You should obtain specific, independent financial professional advice before entering a salary sacrifice arrangement or speak to a reliable taxation specialist.
What is Salary Sacrificing?
Salary sacrificing, also called salary packaging, is basically a way to reduce how much tax you need to pay on an annual basis. To do this, you can arrange an agreement with your employer to reduce how much money you take home every week and the rest of your usual wage can be added to your superannuation as voluntary contributions, or used to purchase things like laptops and phones and cars.
It works in two succinct ways…
Should you elect to contribute “pre-tax” superannuation contributions in lieu of your net pay, you effectively grow your nest egg (superannuation) with no tax payable (on the portion you elect to contribute) in your own name whatsoever. Your superannuation fund will be liable for 15% tax on the superannuation contributions, however funds already generated/contributed in the superannuation fund are used to absorb the tax liability.
This can be a very effective strategy for middle and high income earners with a low appetite for risk who want to avoid tax at their higher nominal tax rates and use the compound earnings of their superannuation fund to fuel their retirement.
The other option/s of salary packaging is to request that your employer pays for a work/business related asset or expense on your behalf in lieu of wages prior once again as a “pre-tax” deduction from your net pay.
Typically, the higher the business/work related use of the expenditure, the higher the cash savings as a result.
Essentially, instead of “banking up” your work related deductions to claim as a tax deduction in your individual tax return once a year, you essentially bring forward the cash benefit of the tax deduction and “sprinkle it” amongst your routine pay cycles, allowing you to experience the cash benefit of the tax deduction on a week-to week basis instead of in bulk at year end.
The rules and regulations regarding salary sacrificing can be confusing as they get quite technical, in almost every salary packaging situation as exposure to fringe benefits tax for the employer needs to be considered. Never enter into a salary package agreement without fully understanding the implications for your individual circumstances.
Is Salary Sacrificing Worth It?
Salary sacrificing may sound like a scary term, but the long term effect of regular contributions into an asset pool that compounds its earnings can be quite substantial.
Keep in mind, if your personal income tax rate is below 15%, there is generally no benefit in salary sacrificing other than adding the portion sacrificed to your superannuation fund to compound.
Also to note is that salary sacrificing/packaging is setup so that the employer is no further in or out of pocket by the arrangement, alleviating any reservations they may have to an employee’s request to salary package.
There are also limits to how much concessional (taxable) contributions you can contribute. The contributions’ cap means that you can contribute up to $27,500 per annum (assuming you don’t satisfy additional criteria) before you are penalised with an excess concessional contribution charge rendering salary sacrifice a useless exercise for most.
Use Salary Sacrificing to Boost Your Superannuation or Buy a House
Salary sacrificing can be an enormous boost to the savings of first home buyers, who can withdraw up to $50,000 in voluntary super contributions to put towards their first home. Since superannuation contributions are taxed at only 15%, the savings are clear when compared to 32.5% for earnings from $45,001 up to $120,000, 37% for earnings earned between $120,001 – $180,000 and 45c for $180,001 or more. The additional cash from tax savings coupled with compound earnings on your additional contributions offer an enticing deposit saving alternative.
What Are Some of The Pros of Salary Packaging?
Some of the financial benefits for middle to upper income earners are clear, but there are some other added pros of arranging a salary package deal with your employer and it is important to speak with a detailed, reputable taxation specialist, such as LeVeon to find out what is best for you.
- Increased pension at retirement – boosting your superannuation can have an enormous effect on the lifestyle you can afford when you retire.
- Access to services – arrangements can be made for packages to include access to things like childcare, gym memberships and healthcare.
- Can be used to buy items – laptops, phones, cars, or even a house.
- Less tax paid – organising to receive less of your wage in the short term can mean thousands of dollars difference.
- Reduced effect on insurance costs – life insurance is usually included in superannuation accounts. The premiums may be tax-deductible as well.
- Reduced investment earnings tax – salary sacrificed funds into super will be invested to increase its value. All earnings resulting from investments within a superannuation account are taxed only at a maximum of 15%, including additional reductions if an asset is sold for profit within the fund.
What are some of the Cons of Salary Sacrificing?
It is important to note that salary sacrificing, or packaging, also has its disadvantages.
- Not covering expenses – part time workers or low-wage earners will be unlikely to benefit, as they will bring home less wages which may not cover the cost of living. Receiving less pay may means a shortfall on necessities such as rent, food and entertainment budgets.
- Tax rate minimums – if you’re not earning above a certain rate, then your additional contributions to your super will be taxed at equal to or higher rate than your earnings, leaving you out of pocket for lifestyle expenses.
- Locked up finances – superannuation is not a savings account. There are very few circumstances that an individual can access the funds prior to retirement.
- Fees – Super funds charge fees and will increase the fee based on the balance.
How Much Could I Save by Salary Sacrificing?
Sometimes it can be easier to understand the benefits of salary sacrificing by seeing the actual numbers. For this example, we assume the individual has no spouse, earning a pre-tax wage of $100,000 AUD and has an arrangement with the employer to package his wage to make voluntary contributions to the individual’s superannuation fund of $15,000 a year (based on tax figures 2019-2020).
Choose LeVeon To Help You Find out If Salary Sacrificing Is Right for You
“Is salary sacrificing right for me?”, well, the ups and downs of salary sacrificing arrangements can make it a difficult decision as to what arrangements you should make. You also need to consider what might happen if your circumstances change, like if you lost your job.
LeVeon Business Advisors have experienced, professional taxation specialists, who can work out the details of your specific financial arrangements. To gain certainty around your future, don’t hesitate to call LeVeon on 0488 008 259 or email email@example.com to arrange an appointment so that we can help you reach your personal and financial goals.