Salary sacrifice: A guide for businesses

Attracting and retaining talent can be instrumental to the success of your business. However, hiring, managing, and retaining employees is no easy feat. Knowing the requirements for tax and payroll compliance is just the start. There are additional benefits you can offer employees to ultimately help retain talent. 

Salary sacrifice is one benefit that employers can offer employees. Salary sacrificing is attractive to employees because they can set aside a portion of their pre-tax wages toward benefits and lower their taxable income. 

Employers with salary sacrifice options can leverage it as an employee benefit to attract top talent. A well-managed and implemented arrangement can create a win-win situation for both you (the employer) and your employees.

This article will cover the ins and outs of salary sacrifices for businesses and its impact on payroll, taxes, and other financial reporting.

What is salary sacrifice?

Salary sacrifice, sometimes called salary packaging, is an agreement between a business and its employee where the employee agrees for part of their pre-tax salary to go towards certain benefits. These benefits may include superannuation contributions, a car, or other non-cash benefits.

Superannuation contributions are among the most popular uses of a salary sacrificing arrangement. Employees agree to have some of their pre-tax income paid into their super account by their employer. This can result in a more tax-efficient way of saving for retirement.

The Australian Taxation Office (ATO) approves salary sacrificing schemes and employees can use them to pay for approved items with their pre-tax earnings. As a result, they may pay less tax on their income.

How does salary sacrifice work?

When an employee agrees to salary sacrifice, the portion they agree to sacrifice pays for benefits they choose before tax. 

For instance, if an employee earns $50,000 per year and sacrifices $5,000 for mortgage payments, their taxable income would be $45,000. The sacrificed portion of the salary goes to home payments before applying tax, which can lower the employee’s overall income tax.

What do businesses usually include in salary packages? 

A salary is the fixed, regular payment made by an employer to an employee. It’s usually a gross annual figure that an employer pays an employee in regular increments (weekly, fortnightly, or monthly). 

On the other hand, a salary package is more than just salary. It includes the base salary and additional benefits that employers provide to employees. These benefits can be either cash or non-cash items. However, common components of a salary package include the following:

Fringe benefits 

Fringe benefits are the additional advantages or bonuses employees receive from their employers, over and above their regular wages. These benefits are not counted as part of an employee’s taxable income but are subject to a separate tax known as the Fringe Benefits Tax (FBT). 

Fringe benefits can take many forms, such as a company car, private health care, fitness club memberships, housing allowances, relocation expenses, travel expenses, and work-from-home reimbursements. Essentially, any non-monetary benefit payment to an employee on top of their normal wage or salary is a fringe benefit.

Exempt benefits

Exempt benefits are a type of fringe benefit that is not subject to FBT. An employer provides these benefits to an employee, separate from their salary or wages. 

According to the ATO, exempt benefits typically include:

• Work-related items: Portable electronic devices (like laptops, tablets, and mobile phones), tools of trade, protective clothing, briefcases, and calculators.
• Minor benefits: Items that have a taxable value of less than $300 and don’t qualify as fringe benefits.
• Relocation: Costs to relocate an employee for work purposes.
• Emergencies: Benefits that employers provide to employees to assist them during emergencies or disasters. 

Super contributions

Salary sacrificing super contributions means an employer and employee have arranged for the put part of their pre-tax wages into their superannuation fund. This can be an effective tax-effective strategy for employees, especially those with higher incomes. 

The sacrificed component from the pre-tax salary goes directly into the superannuation account and gets taxed at 15%, which could be lower than the individual’s marginal tax rate.

However, there’s usually a cap each year before paying extra tax for excess concessional contributions. The combined total of the employer and employee’s salary sacrificed contributions must not be more than $27,500 per fiscal year.

Also, salary-sacrificed super contributions fall under employer super contributions rather than employee tax contributions. This will affect eligibility for some tax offsets and government benefits, so it’s best to consult a payroll expert and BAS agent.

Other items

Salary sacrificing isn’t just limited to super contributions, exempt benefits, and fringe benefits. It can also include a range of items depending on the employer’s policies and the employee’s personal circumstances. Additional items may include cars, loan repayments, parking fees, or education expenses.

Pros and cons of salary packaging for employers

As an employer, you stand to gain several benefits from implementing a salary packaging program in your organisation. These include:

• Hiring and retention: Offering salary packaging options can make a compensation package more attractive to potential employees. It can also aid in retaining current employees by providing them tangible benefits that improve their overall remuneration package.
• Productivity: Employees who feel valued and well-compensated are often more motivated and productive. You can enhance their overall job satisfaction and productivity by providing benefits that directly cater to their needs or preferences.

While this strategy offers a range of potential benefits for employers, it also comes with several challenges, such as:

• Payroll management: Implementing and managing salary packaging arrangements can increase the administrative load of payroll management. It can involve additional record-keeping, reporting requirements, and ensuring compliance with tax laws and regulations.
• Compliance: Salary packaging requires following specific tax laws and employment standards. The slightest mistake or non-compliance can lead to legal issues and penalties.
• Additional short-term costs: Salary packaging can offer tax advantages but also result in additional costs. For example, if the employer provides benefits that attract Fringe Benefits Tax (FBT), this could offset any savings from reducing the payroll tax.

Pros	Cons
Improves an employer’s ability to attract and retain employees.	Increased administrative burden.
Higher employee motivation and productivity.	More legal complexities and potential penalties in case of irregularities.
	Potential added costs in case of too many fringe benefits.

What expenses can you include in your salary packaging? 

The expenses you can include in your salary packaging depend on your policies and the specific terms of your employees’ contracts. Expenses could include:

• Car expenses: Lease payments, fuel, maintenance, and insurance costs for a vehicle used for work purposes.
• Entertainment expenses: Dining out, holiday accommodation, or event ticket expenses.
• Household expenses: Groceries, utilities, and rent or mortgage payments.
• School fees: Payment for private and public schools
• Insurance: Payment of insurance premiums

Get payroll expertise and support

Salary sacrifice is a strategic tool that can significantly benefit your business and its employees. It can help enhance employee retention, boost productivity, and minimise tax liabilities. 

However, managing salary sacrifice requires expertise and precision, especially regarding compliance with tax laws and regulations.

Visory’s payroll and bookkeeping experts can help you manage the intricacies of salary sacrifice arrangements. Our team can handle the increased payroll management duties, including record-keeping, reporting, and compliance.

Contact Visory today to learn how we can help you maximise salary sacrifice benefits for your business and employees.

FAQs

What does salary sacrificing mean for superannuation contributions? 

Salary sacrificing into superannuation is an arrangement where an employee agrees to forgo a portion of their pre-tax salary. This amount is then paid into their superannuation fund rather than receiving it as cash income.