Salary sacrificing can be a beneficial financial strategy, but in our experience, it’s something that employees often do not know much about, or take full advantage of when it is an option.

However, before diving in, it’s essential for employees to fully understand the implications before entering into such arrangements. This blog outlines the key considerations employees in Western Australia (WA) should take into account before agreeing to salary sacrifice through their employment.

What is Salary Sacrificing?

Salary sacrificing, also known as salary packaging, is an arrangement where an employee agrees to forgo a portion of their pre-tax salary in exchange for non-cash benefits, such as superannuation contributions, car leases, or electronic devices. By doing so, the employee can potentially reduce their taxable income, which may lead to tax savings.

However, salary sacrificing is not without its complexities, and careful planning is essential to ensure it works in the employee’s favour.

1. Tax Implications

The primary advantage of salary sacrificing is the potential to reduce your taxable income. Since salary-sacrificed benefits are deducted from your pre-tax salary, your overall taxable income is lower, which could result in paying less income tax.

However, there are some caveats to be aware of:

• Tax on Benefits: Not all salary-sacrificed benefits are taxed in the same way. For instance, contributions to superannuation are generally taxed at a concessional rate of 15%, which may be lower than your marginal tax rate. But some benefits, like fringe benefits (e.g., a car lease), may be subject to fringe benefits tax (FBT), which is paid by your employer. This could reduce the overall benefit of salary sacrificing.
• Marginal Tax Rate: If your salary is relatively high, salary sacrificing might push your taxable income into a lower tax bracket, which can result in significant savings. However, it’s important to ensure the sacrificed amount is not so large that you lose eligibility for tax offsets or concessions.

2. Superannuation Contributions

One of the most common salary sacrifice options is contributing more to superannuation. This is particularly beneficial for employees wanting to boost their retirement savings and take advantage of concessional tax rates.

However, there are limits to how much you can contribute to your superannuation fund at the concessional tax rate. As of the 2023-2024 financial year, the annual concessional contribution cap is $27,500. Contributions above this cap are subject to higher tax rates. It’s crucial to track your contributions to avoid exceeding the cap.

Additionally, salary sacrificing to superannuation means that you will have less take-home pay. Employees must ensure they can still meet their day-to-day living expenses while benefiting from the increased superannuation savings.

3. Impact on Other Benefits

Salary sacrificing can have unintended consequences for other entitlements, particularly in relation to government benefits and loans:

• Government Benefits: Salary sacrificing reduces your taxable income, which might affect your eligibility for government benefits or tax offsets. For example, if you’re eligible for the Medicare levy surcharge or government family benefits, reducing your taxable income could disqualify you from certain benefits.
• Centrelink: The reduction in taxable income may also affect your Centrelink entitlements. If you receive any form of government assistance, such as Newstart, Youth Allowance, or parenting payments, salary sacrificing could impact your eligibility or the amount you receive.
• Loan Applications: When applying for loans, such as a mortgage, banks typically assess your gross income before salary sacrificing. However, some financial institutions may take the sacrificed amount into account, which can affect your borrowing capacity. It’s wise to check with your lender about how salary sacrificing will impact your loan application.

4. Fringe Benefits Tax (FBT)

In Western Australia, as elsewhere in Australia, some salary-sacrificed benefits are subject to fringe benefits tax (FBT). If you are salary sacrificing for non-cash benefits like a car lease, work-related laptop, or mobile phone, the employer may incur FBT, which could reduce the benefit for both you and the employer.

Although the employer typically pays the FBT, the employee might still feel the effects, as employers may adjust their salary or offer fewer salary-sacrifice benefits to offset the tax cost. It’s important to have a clear understanding of whether FBT will apply to your salary sacrifice arrangements and how it might impact your overall compensation package.

5. Employee Agreements and Employer Policies

Before entering into a salary sacrifice arrangement, employees should review their employment contract or any workplace policies that may govern such arrangements. Some employers offer specific salary-sacrifice options or may have restrictions on the types of benefits employees can sacrifice.

• Employer Flexibility: Not all employers allow salary sacrificing, and some may have limited options. Ensure your employer offers the benefits you wish to salary sacrifice before making any decisions.
• Changes in Employment: If you plan to change jobs in the near future, consider how salary sacrificing will affect your entitlements upon departure. You may be required to pay back the sacrificed amount or could face additional tax consequences depending on the timing of your employment termination.

6. Budgeting and Cash Flow

While salary sacrificing can offer tax advantages, it reduces your immediate take-home pay. Employees must carefully assess their cash flow needs to ensure they can cover everyday expenses. For example, if you rely heavily on your salary to meet your living costs, sacrificing too much could strain your budget.

If you are considering salary sacrificing for superannuation contributions or other benefits, be sure to calculate how much you can afford to sacrifice without compromising your financial stability.

7. Seek Professional Advice

Given the complexity of salary sacrificing arrangements, it’s always advisable to consult a financial planner or tax advisor before committing to a salary-sacrifice arrangement. They can help you navigate the tax implications, ensure you stay within contribution caps, and assist with structuring your salary sacrifice in the most effective way for your financial goals.

Conclusion

Salary sacrificing can be a powerful tool to reduce tax and save for the future, particularly when used to boost superannuation or access other non-cash benefits. However, employees in Western Australia need to carefully consider the potential impacts on their taxes, superannuation, government benefits, and overall cash flow. It’s essential to understand the full scope of salary sacrifice and ensure that the benefits outweigh any potential drawbacks. Just because it is offered by an employer as a carrot to entice employees into employment, does not mean that it is necessarily a good thing, or right for the employee. Carefully consider your options, and, if in doubt, seek legal advice about what it means for your employment.

By doing so and seeking appropriate professional advice, employees can make informed decisions that help secure their financial well-being both now and in the future.