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Can you salary sacrifice your mortgage?
12 July 2022
Most of us have heard of salary sacrificing into super but did you know you may be able to salary sacrifice your mortgage? HLB Mann Judd tax expert Jennie Picton shares a look at the rules and how much you could potentially save.
What is salary sacrificing?
Salary sacrificing is an arrangement, also known as salary packaging, where an employee’s total remuneration package is structured between cash and other benefits, rather than entirely as salary. Under a salary sacrifice arrangement an employee forgoes, or sacrifices, part of their salary in lieu of an agreed non-cash benefit. This non-cash benefit may include super contributions, mortgage repayments, a car or school fees. Broadly, the aim of a salary sacrifice arrangement is to maximise the employee’s after-tax benefit in a way that is also cost-effective to the employer.
Salary sacrificing and Fringe Benefits Tax
Benefits may be subject to Fringe Benefits Tax (FBT), which is a tax that some employers pay for benefits paid to an employee (or their associate, such as a family member) in addition to their salary or wages. Employers operating in certain sectors may be entitled to an FBT exemption or rebate and as a result can provide salary packaged benefits to employees much more cost effectively than other employers. This is generally limited to certain hospitals, registered charities, and other not-for-profit organisations.
Your after-tax position will vary depending on the type of benefit provided and its FBT treatment. This determines whether a salary sacrificing arrangement is cost-effective to both you and your employer.
A look at the rules
Generally, mortgage payments would be considered a fully taxable fringe benefit. This means that the taxable value of the mortgage payment does not attract any concessional valuation so the employer will have to pay FBT on the full amount. If the employer is exempt from FBT or ‘FBT rebatable’, however, there can be a financial advantage in salary sacrificing mortgage payments.
FBT-exempt employers can provide employees with benefits free of FBT, up to the following specified capped limits:
- $17,000 for an employee of a public hospital or public ambulance service; or
- $30,000 for an employee of a health promotion charity or a non-hospital Public Benevolent Institution (PBI).
Rebatable employers include certain not-for-profit organisations, some registered charities, certain educational institutions, trade unions and employer associations. These types of employers are entitled to a rebate of 47% of the FBT payable, limited to benefits with a grossed-up taxable value of $30,000 for each employee, which is the cost-effective cap limit.
For other employers, unless the employee is subject to the top marginal income tax rate, there is likely to be a financial disadvantage in salary sacrificing mortgage payments.
Hypothetical examples
Let’s look at three different scenarios for an employee with a base salary of $100,000 per year. Their employer agrees to mortgage payments amounting to $15,899 per year. The grossed-up mortgage payments are less than the $30,000 limit.
1. Employee of an FBT-exempt employer with a salary packaging cap of $30,000
← Mobile/tablet users, scroll sideways to view full table →
| Without packaging |
With packaging |
|
|---|---|---|
| Salary | $100,000 | $100,000 |
| Mortgage payments |
$15,899 | |
| FBT payable (see below) |
Nil | |
| Total package, excluding superannuation |
$100,000 | $84,101 |
| Less: tax and Medicare levy |
$24,967 | $19,482 |
| After-tax salary | $75,033 | $64,619 |
| Less: mortgage payments |
$15,899 | – |
| Net cash remaining | $59,134 | $64,619 |
| Net saving to the employee |
$5,485 | |
| FBT calculation | ||
| Taxable value | $15,899 | |
| Gross-up factor | 1.8868 | |
| Taxable amount | $30,000 | |
| Less: exempt amount (limit $30,000) |
$30,000 | |
| Taxable amount | Nil | |
| FBT rate | 47% | |
| FBT payable | Nil |
2. Employee of an FBT-rebatable employer
← Mobile/tablet users, scroll sideways to view full table →
| Without packaging |
With packaging |
|
|---|---|---|
| Salary | $100,000 | $100,000 |
| Mortgage payments |
$15,899 | |
| FBT payable (see below) |
$7,473 | |
| Total package, excluding superannuation |
$100,000 | $76,628 |
| Less: tax and Medicare levy |
$24,967 | $16,904 |
| After-tax salary | $75,033 | $59,724 |
| Less: mortgage payments |
$15,899 | – |
| Net cash remaining | $59,134 | $59,724 |
| Net saving to the employee |
$590 | |
| FBT calculation | ||
| Taxable value | $15,899 | |
| Gross-up factor | 1.8868 | |
| Taxable amount | $30,000 | |
| FBT rate | 47% | |
| FBT before rebate | $14,100 | |
| Less: FBT rebate (47%) | $6,627 | |
| FBT payable | $7,473 |
3. Employer neither FBT-exempt nor FBT-rebatable
← Mobile/tablet users, scroll sideways to view full table →
| Without packaging |
With packaging |
|
|---|---|---|
| Salary | $100,000 | $100,000 |
| Mortgage payments |
$15,899 | |
| FBT payable (see below) |
$14,100 | |
| Total package, excluding superannuation |
$100,000 | $70,001 |
| Less: tax and Medicare levy |
$24,967 | $14,617 |
| After-tax salary | $75,033 | $55,384 |
| Less: mortgage payments |
$15,899 | – |
| Net cash remaining | $59,134 | $55,384 |
| Net cost to the employee |
$3,750 | |
| FBT calculation | ||
| Taxable value | $15,899 | |
| Gross-up factor | 1.8868 | |
| Taxable amount | $30,000 | |
| FBT rate | 47% | |
| FBT payable | $14,100 |
Can you salary sacrifice your mortgage?
Each organisation will have its own policy about salary sacrificing so you’ll need to check with your HR or payroll department to see if it’s an option for you. It’s important to do your sums to consider whether salary sacrificing mortgage payments will provide you with a positive cash advantage.
If your employer agrees to salary sacrifice your mortgage payments, the arrangement should be formally agreed in writing. This sets out the terms of the salary sacrifice, the amount, and the details of the nominated lender to whom the mortgage payment will be made.
Once in place, you’ll have no access to the sacrificed salary amount for the term of the agreement. The mortgage payment will be deducted from your pre-tax salary and paid directly to your lender.
The arrangement must be negotiated before you have earned the amount as salary or wages – a salary sacrifice cannot be redirected after the employee already has the entitlement to receive the salary for the period.
What you need to know
If you work for an employer who is FBT-exempt or FBT-rebatable, there generally will be tax savings, as pre-tax income is paid directly to your lender, reducing your taxable income.
Making payments from your pre-tax income may give you the opportunity to put more money towards your mortgage, with the potential benefit of reducing interest payments over the life of the loan and paying off the mortgage earlier than expected.
Where the FBT exemption or rebate are not available to employers, there is little benefit for employees in salary sacrificing mortgage payments, and employees taxed at less than the top marginal rate will probably suffer a disadvantage from salary sacrificing their mortgage payments.
It’s worth noting that as salary sacrificing reduces your taxable income, employer superannuation contributions will also be reduced.
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Cover image source: zstock/Shutterstock.com
About Jennie Picton
Jennie Picton is a tax manager at HLB Mann Judd Sydney, where she has worked since 2013. Jennie provides taxation compliance and advisory services to a range of clients.
This article was reviewed by our Sub Editor Tom Letts before it was updated, as part of our fact-checking process.
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