Salary Sacrificing

Salary sacrifice might sound like a scary and confusing concept.

But, as Rebecca Spicer discovers, if you are clear about why you want to offer a salary sacrificing option to your staff and if you get the right advice on how to manage the offer, it can be a win-win situation for your business and for staff.

PayGlobal, a New Zealand-based people management software company, recently expanded its operations into Australia, with 35 local staff currently on their books. The company’s director of professional services, David Janssen, says PayGlobal started offering employees a salary sacrificing option in their pay package following a request from staff wanting to put more of their pre-tax pay into superannuation. The company is now also offering other benefits, such as laptop computers and cars, for staff to purchase with pre-tax dollars, reducing their taxable income and saving them money in the long run.

"Offering a salary sacrifice option helps make us more competitive against other software companies who also offer this to staff as part of their standard salary packages," Janssen says.

So what is it and how does it work? Also commonly referred to as salary packaging or total remuneration packaging, in simple terms salary sacrifice is an arrangement between an employee and an employer where the employee is giving up part of their income (the sacrificed component) for another benefit. "So rather than get after-tax cash in your back pocket, you’re basically trading that off for other particular benefits," explains Hugh Elvy, manager of financial planning and superannuation at the Institute of Chartered Accountants Australia (ICAA).

The key issue is that it’s an opportunity for employees to reduce their tax, adds Matthew Honan, principal of salary packaging service provider, Remunerator. "It gives employees the ability to structure their package to minimise their tax and maximise the money in their own pocket."

The types of salary that can be sacrificed include salary and wages, leave entitlements, and bonuses and commissions. There is no limit on the amount of salary that can be sacrificed, unless there is a minimum salary or wage stated under an industrial award. Employees only pay tax on their reduced salary but receive the reduced salary plus the benefits.

All non-cash benefits can be sacrificed, forming part of an employee’s remuneration and replacing what otherwise could have been paid as salary. The types of benefits employers will generally provide in salary sacrifice arrangements include fringe benefits, exempt benefits, and superannuation.

Common fringe benefits include cars, property (such as shares or bonds), and expense payments (such as loan repayments, school fees, child care costs, and home phone costs). Offering these benefits will incur a fringe benefits tax (FBT) payable by the employer. The rate will vary depending on the type of benefit.