What is salary sacrifice and how does it work?

The word sacrifice usually suggests you’re giving something up. But in the case of salary sacrificing, 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 in Australia. 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 voluntary contributions to your superannuation account.

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

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 this agreement 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 can start when you first begin a new job or after you’ve been working for the same employer for a while, but either way you can only salary sacrifice a portion of a ‘future entitlement’. This means you can’t salary sacrifice any of your 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, usually in exchange for an agreed portion of your pre-tax salary or wages. The ATO says that there is no restriction on the types of benefits you can receive from a salary sacrifice arrangement.

There are three broad categories of benefits, it says:

• Fringe benefits – such as cars, property, loan repayments, school fees and childcare costs. Your employer will likely pay fringe benefits tax (FBT) on these benefits.
• Exempt benefits – such as work-related portable electronic devices, computer software, protective clothing, briefcases and tools of trade. Your employer will not have to pay FBT on these if they are primarily for work-related use.
• 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 into your 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 superannuation 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 (the highest rate of tax you pay on your wage and other income).

Salary sacrificed super contributions are paid on top of your employer’s compulsory super contributions. This is currently 10% of your salary and will increase to 10.5% on 1 July 2022.

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 $27,500 per financial year. Concessional contributions (such as super guarantee contributions and salary sacrifice contributions) that exceed this cap will be taxed at your marginal tax rate. Your cap may be higher if you didn’t use the full amount in earlier years, under the carry-forward rules.

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 help buy their first home.

This amount will increase to $50,000 on 1 July 2022. This would include any salary sacrifice contributions and the associated earnings.

Eligibility requirements apply, as well as rules around releasing your super.

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 is usually more effective for people on middle to high incomes, according to ASIC’s Moneysmart. But generally, Moneysmart says salary sacrificing super can be tax-effective if you earn more than $37,000 per year. If you earn $37,000 or less, you may be eligible for the low income superannuation tax offset (LISTO) of up to $500 a year.
• 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 that facilitates the salary sacrifice arrangement (if applicable) may 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.

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