What is Salary Packaging?

 
Salary packaging or salary sacrificing is approved by the Australian Tax Office (ATO) which allows you make purchases out of your pre-tax salary. Paying for items such as motor vehicles before taxes effectively lowers your taxable income, helping you to put even more money into your pocket. This option is accessible to employees who work in an organisation that qualifies for Fringe Benefit Tax (FBT) exemption.

Salary packaging is essentially an agreement between the employee and the employer where the employee agrees to sacrifice part of their salary to pay for benefits offered by the employer. Items included in the salary package are paid for in pre-tax dollars, which effectively increases take home pay. Such arrangements are now common throughout Australia.

Items which can be salary packaged include:

  • Motor vehicles
  • Mobile phones
  • Laptop computers

Some companies even allow employees the option to salary package other items such as household utility bills and mortgage payments although this generally requires special arrangements with a third-party company. Charities and nonprofit organisations are able to do this most effectively as they are exempt from Fringe Benefits Tax.

Salary Package Limitations

Depending on who you work for, there are limitations as to how much you can salary package. This includes:

  • $9,095 for hospitals and nonprofit organisations
  • $16,050 for all other employees

Eligibility is generally available to all full time and part time employees although some conditions may apply. Check with your employer to find out if you can take advantage of salary packaging.

Salary Packaging Requirements

There are certain conditions that must be met first for an effective salary sacrifice agreement. These are:

  • The arrangements should be made prior to starting work
  • A written agreement between the employee and employer detailing all terms
  • No access to the salary that is sacrificed
  • Any wages prior to a salary sacrifice agreement cannot be part of the arrangement
  • Any fringe benefit that is cashed out is taxed as normal income

Certain salary packages attract Fringe Benefits Tax which is a tax that is levied on the employer for non-cash benefits. This amount is currently at 46.5% and only applies to certain items. Items such as laptops and mobile phones are exempt from FBT. Employers are able to benefit through salary packaging arrangements by recovering the liability from the employee.

How Much You Can Save

Salary packaging offers numerous benefits for employees which include paying less taxes and increasing disposable income. The following is an example based on an employee earning $50,000 and salary packaging $16,050 a year:

Without Salary Packaging

Gross salary: $50,000

Taxable salary: $50,000

Less income tax: $8,547

Total take home salary: $41,453.00

With Salary Packaging

Gross salary: $50,000

Salary packaging: $16,050

Taxable salary: $33,950

Less income tax $3,501.75

Salary (net): $30,448.25

Total take home salary: $46,498.25

The employee in this situation is effectively able to take home an additional $5,000 in disposable income just through salary packaging alone and ends up paying less in taxes. This example is only for illustration purposes based on the information above. Actual taxation amounts will depend on various factors.

The advantages of salary packaging are clear and more employees throughout Australia are beginning to take advantage of this option with their employers. Salary packaging is also a beneficial option for those who wish to finance a vehicle.

Car Salary Sacrificing

Car salary packaging offers employees a great deal of flexibility to purchase a new or used vehicle and pay for its running costs from pre-tax income. This option leads to significant tax savings and additional benefits to the employee. The employer is responsible for the lease payments and the employee agrees to forgo a portion of their salary.

Benefits to the employee include:

  • Tax savings through salary sacrificing
  • Flexibility in choosing a range of vehicles
  • Unrestricted use of the vehicle for work and private use
  • Option to purchase the vehicle out right at the end of the term

Benefits to the employer include:

  • Cost effective way to operate a fleet of company vehicles
  • Company does not assume any risk for the vehicles
  • Income tax reduction for all payments made
  • Takes the responsibility away of recording the vehicle as an asset or liability

Sacrificing a portion of your salary each month is one of the smartest ways to finance a vehicle while reducing your taxable income in the process. You can even reduce the Fringe Benefit Tax by using your post tax income towards the running costs of the vehicle with the Employee Contribution Method (ECM).

Anyone who is employed and has approval can be able to salary sacrifice to finance a vehicle. This type of arrangement is also called novated leasing. Government employees are already pre-qualified to arrange a novated lease to their employers. All private and non-government employees can easily make arrangements for a car salary sacrifice.

How a Novated Lease Works

Getting started with a novated lease to finance a new or used vehicle is fairly straightforward. Upon finding an ideal vehicle that meets your requirements, arrangements are then made for its purchase. All payments are made directly from your salary before the final calculations of your tax, thereby reducing your taxable income.

A three way arrangement between you, your employer, and the finance provider is then made and a Deed of Novation is signed. You can then take delivery of your vehicle and your employer is now responsible for making all lease payments on your behalf based on prior arrangements.

If you change jobs before the lease expires, you can either pay the remaining amount outright or novate the vehicle again with your new employee. Certain restrictions apply on the type of vehicle you can novate and its purchase price depending on your employer.

Fleet Network has extensive experience with novated car leasing and salary sacrificing. Contact us today to get started with our services and one of our financial consultants will be there to assist you every step of the way.

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