Salary packaging (or salary sacrifice) is a mechanism used by many employers to increase rewards to employees without increasing the costs to the employer. Many people are too nervous to explore the options because they are confused or they believe salary packaging is only for the very highly paid. However, there can be benefits for a wide range of people. The intention of this guide is to make some of the options more comprehensible.
Most staff are paid a salary from which income tax is deducted before they receive it. The staff member then uses this after-tax money to pay for a range of products and services. In many cases, there may be a further tax paid in the form of GST.
With salary sacrificing, the staff member asks the employer to pay for the product or service on their behalf instead of receiving part of the salary – hence ‘salary sacrifice’. Because the staff member receives less paid income there will be a reduction in the amount of income tax. However, this does not mean that no tax is paid. Instead of income tax, Fringe Benefits Tax (FBT) has to be paid on most of the items that can be salary packaged.
In some cases, the employer can recoup the GST and reduce the net cost to the employee.
The key broad principle in salary packaging is that income tax (and perhaps GST and Medicare Levy) are reduced for a staff member but replaced with FBT. If the FBT incurred is greater than the other taxes saved, then it is unlikely to be worth salary packaging. On the other hand, if FBT incurred is less than the other taxes saved, then it may be worth exploring.
Whilst Income Tax is relatively straightforward and widely understood, Fringe Benefit Tax is undoubtedly more complex. For instance, the FBT payable on a vehicle is generally linked to the cost of the vehicle and the kilometres travelled in a year, and are not affected by the amount spent on insurance, fuel or repairs. Further information regarding the FBT payable on a vehicle can be viewed at this Australia Taxation Office (ATO) link:
SCEA also has a reduced rate of FBT because it is a charitable institution registered with the Australian Tax Office.
Because of these complexities, SCEA strongly recommends that staff obtain independent financial advice from a licensed advisor before setting up a salary packaging agreement.
SCEA offers staff the option of salary packaging. Because each staff member’s circumstances are different, each person has to make a personal assessment of what he or she would like to do (preferably in consultation with an independent financial adviser), and then request SCEA to implement the package. SCEA cannot automatically set up packages for staff; this is something a staff member has to request.
SCEA offers staff the option to package a number of items. Some items can be processed within SCEA (in-house items), whilst others have to be processed by Selectus or Salpac, the salary packaging companies used by SCEA. You have a choice regarding which company, Selectus or Salpac, to use.
If you decide to package additional superannuation contributions, you will be dealing with SCEA directly and not with Selectus or Salpac. You will not be charged a packaging fee, you also will not receive any financial advice from SCEA staff.
In-house Option– Additional Superannuation
SCEA pays an amount equivalent to 9.5% of your salary, the Superannuation Guarantee Contribution (SGC), to a superannuation fund of your choice. However, you may also wish to direct some of your salary to your superannuation fund. The amount that you contribute can be either taken from your salary before tax is calculated or after-tax.
Most staff contribute from before-tax earnings as the superannuation contribution tax they will incur is usually less than the income tax they save. However, there are limits that apply to concessional contributions and exceeding these limits can result in additional tax. Further details can be viewed at this ATO link:
For staff with an annual income below $50,454, there may be advantages in also contributing up to $1,000 per year from after-tax earnings as you could get a Superannuation Co-contribution from the ATO. Further details can be viewed at this ATO link:
Please complete and submit the After-Tax Superannuation Contributions Form available from the SCEA website if you want to make contributions to your superannuation fund.
If you want to take advantage of the Government Co-contribution Scheme, your after-tax contributions have to be received by your superannuation fund before the end of June each year. To ensure this happens in the current tax year, SCEA will have to deduct these amounts from salaries before the end of May. This does not preclude staff from making their own direct payments. We can set up fortnightly deductions for staff to achieve a particular target for June each year.
There is nothing to stop staff requesting SCEA to deduct either before-tax or after-tax or a combination of both. It is each staff member’s responsibility to ensure that they have taken appropriate advice.
All superannuation contributions will be processed by SCEA, not by Selectus or Salpac.
Selectus and Salpac Options
1. Motor Vehicles
Many employees could benefit from packaging a vehicle due to the tax treatment of this item. You can package a new or used car and all the running costs including fuel, insurance, registration, servicing etc.
2. Other costs
Further costs than can be salary packaged via Selectus or Salpac include private mortgage and rent payments, and health insurance. Staff should note that there is a ceiling on the total amounts that can be cost-effectively packaged. If this limit is exceeded, salary packaging will almost certainly cost staff more than paying for items with after-tax earnings.
Staff should note that this guide has been provided for general information purposes only and does not take into account individual circumstances. Staff should consider their own circumstances or consult a licensed financial advisor prior to making any salary packaging decisions.