What is salary sacrificing and how does it work?

TAMIKA SEETO
Finance Journalist · 28 January 2021
The word sacrifice usually suggests you’re giving something up. But in the case of employees who salary sacrifice, there could potentially be something to gain.

To help you decide whether it’s something worth pursuing, here’s a quick overview of salary sacrificing and how it works. You may want to consider getting professional advice to work out if a salary sacrifice arrangement is right for your circumstances.

What is salary sacrifice?

A salary sacrifice arrangement is when you agree to receive less take-home income from your employer in return for benefits. These benefits are paid out of your pre-tax salary. Benefits can include goods and services like a car or laptop or contributions to your superannuation account.

For example, if your income was $80,000 per year before tax, you may choose to receive $70,000 as income and salary sacrifice $10,000 into your super. The Australian Taxation Office (ATO) says you’ll only pay income tax on your reduced salary. This means your taxable income would be reduced to $70,000 in this hypothetical scenario.

Salary sacrificing
Source: Miha Creative/Shutterstock.com

How does salary sacrifice work?

Salary sacrificing is an arrangement made between you and your employer. Some employers use a third party to facilitate salary sacrificing for their employees. Once it is in place, an agreed amount will be deducted from your pre-tax salary to go towards your benefits over a predetermined amount of time.

The arrangement has to be set up before you start the work that you will be paid for. You can’t salary sacrifice using salary and wages, leave entitlements, bonuses or commissions that you accrued before you entered into the arrangement, the ATO says.

What can you salary sacrifice?

What you can salary sacrifice will depend on your employer. Common benefits include contributions to your superannuation, and the cost of items such as cars (usually through a novated lease), phones and laptops. The ATO says that there is no restriction on the types of benefits you can sacrifice.

There are three broad categories of benefits, it says:

  • Fringe benefits – such as cars, loan repayments, school fees and childcare costs. Your employer will pay fringe benefit tax (FBT) on these benefits.
  • Exempt benefits – such as portable electronic devices, computer software, protective clothing, briefcases and tools of trade. Your employer will not have to pay FBT on these as they are work-related items.
  • Superannuation – if salary sacrificed super contributions are made to a complying super fund, the sacrificed amount is not a fringe benefit and so FBT does not apply, the ATO says.

Let’s look at salary sacrificing super in more detail.

Salary sacrificing superannuation

If you’re looking to boost your retirement savings or buy your first home, salary sacrificing into super could be an option to think about.

Salary sacrificing super involves having a portion of your before-tax salary or wages paid into your super account. According to the ATO, salary sacrificed super contributions are classified as employer super contributions, rather than employee contributions. This means they are usually taxed at the concessional rate of 15%, which will typically be lower than your marginal tax rate (that is the tax you pay on your wage and other income).

Salary sacrificed super contributions are paid on top of your employer’s compulsory super contributions, which is currently 9.5% of your salary.

There’s no limit on how much you can salary sacrifice into super. However, it’s important to consider your concessional contributions cap. This is currently $25,000. Concessional contributions (such as super guarantee contributions and salary sacrifice contributions) that exceed this cap will be taxed at your marginal tax rate plus an excess concessional contributions charge.

First home buyers

Salary sacrificing into super may also help you save for your first home. Under the government’s First Home Super Saver Scheme, first home buyers can withdraw up to $30,000 in voluntary super contributions to buy their first home. This would include any salary sacrifice contributions and the associated earnings.

Key considerations before committing to a salary sacrifice arrangement

While a salary sacrifice arrangement can have certain benefits as outlined above, there are some issues to be aware of. For example:

  • Salary sacrificing super may be less suitable if you have a low income. According to ASIC’s Moneysmart, salary sacrificing is usually more effective for people on middle to high incomes. This is because contributions will be taxed in the super fund at 15%. If you are on a low income, this may be more than your normal income tax rate.
  • Salary sacrificed super contributions may push you over the concessional contributions cap, which, according to the ATO, would attract additional tax.
  • Once the money is in your superannuation fund, it’s generally there until you retire. There are some limited ways to potentially access superannuation earlier, like through the First Home Super Saver Scheme, but otherwise it’s part of your retirement nest egg.
  • The company who facilitates the salary sacrifice arrangement will usually charge you an administration fee. This will typically be paid out of your pre-tax dollars. Additional charges may also apply to benefits like a novated lease.

The effectiveness of salary sacrificing will depend on your individual financial situation, so you may want to consider getting financial advice and/or tax advice from your accountant before requesting or agreeing to a salary sacrifice arrangement.

If you’re comparing Superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.

Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group you specified above.

Cover image source: lovelyday12/Shutterstock.com

This article was reviewed by our Deputy Editor Sean Callery and Finance & Lifestyle Editor Shay Waraker before it was published, as part of our fact-checking process.

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