Can you salary sacrifice your mortgage?

Most of us have heard of salary sacrificing into super but did you know you may be able to salary sacrifice your mortgage? Here’s a look at the rules and how much you could potentially save.

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.

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 gross-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

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 $26,497 $20,562
After-tax salary $73,503 $63,539
Less: mortgage payments $15,899
Net cash remaining $57,604 $63,539
Net saving to the employee $5,935
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

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 $26,497 $17,984
After-tax salary $73,503 $58,644
Less: mortgage payments $15,899
Net cash remaining $57,604 $58,644
Net saving to the employee $1,040
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

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 $26,497 $15,697
After-tax salary $73,503 $54,304
Less: mortgage payments $15,899
Net cash remaining $57,604 $54,304
Net cost to the employee $3,300
FBT calculation
Taxable value $15,899
Gross-up factor 1.8868
Taxable amount $30,000
FBT rate 47%
FBT payable $14,100

 

Employer and employee talking
Source: fizkes (Shutterstock)

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.

 

Cover image source: Prostock-studio (Shutterstock)

This article was reviewed by Editorial Campaigns Manager Maria Bekiaris before it was published as part of our fact-checking process.

 


Jennie PictionAbout Jennie Picton

Jennie Picton is tax supervisor at HLB Mann Judd Sydney, where she has worked since 2013. Jennie provides taxation compliance and advisory services to a range of clients.

 

 

 

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