Salary sacrifice and your staff
Salary sacrifice is a way for employees to be paid in a form other than a bank deposit, where they agree to take part of their wage in a form such as a benefit. Having extra money put into super is a popular option. The upside for staff is that their income tax liability is then based only on the reduced pay.
Not that the benefits will be totally tax-free; you, as the employer, will have to pay fringe benefits tax (FBT) on these (if 'taxable' benefits) instead of the employee. The business will also generally get a tax deduction for the cost of providing taxed benefits.
If you agree to a salary sacrificing arrangement, the end result for the employee should equal the value of the portion of salary given up. Apart from super, options include a car, shares or payments for private expenses such as school fees, child care or home phone costs, for example.
There's little restriction to the sorts of things employees can ask for, but while they may have their own wish list, you may need to investigate whether or not any of them fall into the FBT net, and if so, the total tax-inclusive cost to the business (see FBT details here).
After super, the other usual fringe benefits that make their way into a salary sacrifice arrangement include:
- cars (a popular option is to get a car on a novated lease ... see details here)
- property (including goods, land and buildings, and shares or bonds), and
- expense payments (such as loan repayments, school fees, child care costs and home phone costs).
Basically, there are certain benefits that are not subject to FBT, and because they don't generate more tax for your business, might be more appealing.
The following work-related items commonly provided in salary sacrifice arrangements are FBT-exempt benefits:
- a portable electronic device
- an item of computer software
- an item of protective clothing
- a briefcase, and
- a tool of trade.
FBT-exempt items include mobile phones, protective clothing, tools and so on (again, check our FBT page for the full list). Laptops can be exempt within certain limitations, such as a work-only use of the laptop, and that only one per year can be provided per employee.
You will need to report certain benefits, known as 'reportable fringe benefits', on annual tax payment summaries (where the total taxable value of all 'reportable benefits' provided in a year is greater than $2,000 – exempt benefits and certain taxable benefits don't count). And although the values of reportable fringe benefits are shown on employees' income tax returns, it will not affect their assessable income or Medicare levy. The total will however be used to calculate entitlements to income-tested government support programs or benefits.
Topping up superannuation is a hugely popular option for salary sacrifice arrangements. There are several benefits for your business if staff go down this path. For starters, any super put away under such a scheme to a complying fund is not considered a fringe benefit, and your business will not have to pay FBT on it.
Another bonus is that such super contributions also give you an extra tax deduction. And for your employee, within limits, the super fund would only pay 15% tax on the earnings from these contributions, which would probably be less than the overall tax that the employee would otherwise pay as regular income.
The fly in the superannuation ointment may be the reduced deductibility caps to contributions from employers (which includes the super guarantee amounts and any salary sacrificed amounts). The threshold if employees are under 50 years age is $30,000, and if over 60 it's $35,000 (starting from July 1, 2013) and includes insurance premiums paid to the fund as well as admin charges. From July 1, 2014, people who are over 50 and over will also benefit from the higher cap of $35,000. The excess contributions tax payable on contributions over these caps is at your personal tax rate plus interest – instead of at the highest tax rate of 47% (set to increase to 49% from 1 July 2014 to 30 June 2017 to factor in the temporary budget repair levy) . See all the details in the 'Super contribution clampdown' story.
From a tax point of view, a salary sacrifice deal can be re-negotiated anytime, although with a work contract it is more usual to set up these sort of arrangements from the beginning.
Last reviewed 25/07/2014