What Is Salary Sacrificing/ Packaging? A Smart Strategy to Save on Tax 

Want to pay less tax while maximising your financial benefits? Salary sacrificing, also known as salary packaging, could be a smart strategy for you to consider.  

What is Salary Sacrificing? 

Salary sacrificing, also known as salary packaging, is a tax-effective strategy that allows employees to forgo a portion of their pre-tax salary in exchange for specific benefits. This reduces taxable income, potentially lowering the tax paid while providing valuable financial advantages. 

How Salary Sacrificing Works 

Under a salary sacrifice arrangement, you and your employer agree that a portion of your salary will be used for certain eligible expenses or superannuation contributions before tax is deducted. This reduces your taxable income, meaning you may pay less tax overall. 

Setting up this arrangement before earning the income you intend to sacrifice is essential, and it must be agreed upon between you and your employer. 

Top 4 Salary Sacrificing Options to Consider 

1. Superannuation Contributions

For individuals earning $45,000 or more annually, salary sacrificing into superannuation is an effective way to boost retirement savings while reducing taxable income. These contributions are taxed at just 15%, often lower than an individual’s marginal tax rate. 

This strategy is particularly beneficial for those approaching retirement who want to maximise their super savings. 

2. Benefits for Public Hospital and Not-for-Profit Employees

Employees in specific sectors, such as healthcare and not-for-profits, can salary package additional expenses which attract no fringe benefits tax implications: 

• Public Hospital Employees: Can package up to $9,010 per year for general living expenses and an additional $2,650 for meal entertainment and holiday accommodation. 

• Not-for-Profit Employees: Can package up to $15,900 per year for general living expenses and an additional $2,650 for meal entertainment and holiday accommodation. 

A fringe benefit is like a payment to an employee, but in a different form to salary or wages. 

3. Fringe Benefit Tax (FBT) Exempt Assets

Certain work-related items are exempt from Fringe Benefits Tax (FBT), making them ideal for salary sacrificing. These include: 

• Portable electronic devices like laptops, mobile phones, and tablets 

• Computer software 

• Protective clothing 

• Tools of trade 

• Electric vehicles (EVs)* 

*To be eligible for the exemption, the value of the electric car must be below the LCT threshold for fuel efficient vehicles at the time it is first sold in a retail sale, and in any subsequent sale. 

Since these benefits are exempt from FBT, they provide even more significant tax advantages. 

Example: Salary Sacrificing an Electric Motor Vehicle 

Sally earns $65,000 annually and considers salary sacrificing an electric car worth $35,000. Her employer also covers $11,500 in running costs financed by way of using Sally’s pre-taxed earnings. Without salary sacrificing, Sally would pay these costs out-of-pocket, reducing her disposable income. 

An effective salary sacrifice arrangement will reduce her taxable income, leading to a lower tax bill. Sally could see an improvement in her net disposable income. This demonstrates how salary packaging can optimise financial outcomes. 

4. Fringe Benefit Tax (FBT) Concessional Benefits

Certain expenses are concessionally taxed such as the provision of a combustion vehicle.  If you prefer to acquire a combustion vehicle and it satisfies the requirements of a ‘car fringe benefit’ employers are able use the concessional valuation methods (being either the Statutory formula method or the Operating cost method) to determine the taxable value of the car fringe benefit. 

Key Considerations for Salary Sacrificing 

• Seek Professional Advice: Salary-sacrificing arrangements should be tailored to your individual financial situation. Some benefits, such as Centrelink payments or employer-provided benefits, may impact other entitlements. 

• Understand Reportable Benefits: Some sacrificed benefits such Electric Vehicle benefits that are as exempt fringe benefits tax must be reported on your income statement and could affect government benefits or tax obligations. 

• Ensure Compliance: Arrangements must be made before earning the income to be sacrificed. Payments deducted directly from after-tax salary do not qualify. 

Start Your Tax Planning Early 

Salary sacrificing requires forward planning. The earlier you start, the more time you have to implement tax-saving strategies that align with your financial goals. We encourage our clients to meet with their advisors when they first are considering taking advantage of salary sacrificing and well before June 30 to discuss the strategies applicable to them. 

Ready to Boost Your Tax Savings? How Morrows Can Help 

Navigating salary sacrifice arrangements can be complex. Our team at Morrows can help you evaluate whether salary packaging is right for you and guide you through structuring an effective plan. 

Want to find out how salary sacrificing can work for you? Contact Morrows today on 03 9690 5700 for a tailored strategy that maximises your tax savings. 

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