What is a salary sacrifice arrangement?
A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. It is an arrangement between an employer and an employee, whereby the employee agrees to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar cost (to the employer). The employee is likely to place greater value on the benefit than its cost to the employer.
The arrangement should be entered into before you perform the work
If the arrangement is put into place after the work has been performed, the salary sacrifice arrangement may be ineffective.
There should be an agreement between you and your employer
It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement. If you enter into an undocumented salary sacrifice arrangement, you may have difficulty establishing the facts of your agreement. Subject to the terms of any contract of employment or industrial agreement, employees can renegotiate a salary sacrifice arrangement at any time. Where you have a renewable contract, you can renegotiate amounts of salary or wages to be sacrificed before the start of each renewal.
The contract of employment includes details of your remuneration, including any salary sacrifice arrangement. This contract can be varied by agreement between you and the employer.
There should be no access to the sacrificed salary
The sacrificed salary must be permanently forgone for the period of the arrangement. If a fringe benefit that has not been provided is cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is salary and is taxed as normal income.
What types of benefits can be included?
There is no restriction on the types of benefits that can be sacrificed. The important thing is that these benefits form part of your remuneration, replacing what otherwise could have been paid as salary. The types of benefits generally provided in salary sacrifice arrangements by employers include fringe benefits, exempt benefits and superannuation.
Fringe benefits
Common fringe benefits include:
cars
property (including goods, real property such as land and buildings, and shares or bonds), and expense payments (such as the payment of your loan repayments, school fees, child care costs and home phone costs).
Exempt benefits
A number of benefits are exempt from FBT. Expense payment, property or residual benefits arising for the following items commonly provided in salary sacrifice arrangements are exempt benefits.
A notebook computer, laptop computer or similar portable computer. The exemption for portable computers is limited to the purchase or reimbursement of one computer per year per employee.
A mobile phone or car phone that is primarily for use in your employment.
Superannuation
Salary sacrificed superannuation contributions under an effective salary sacrifice arrangement are considered to be employer contributions which, when paid in respect of an employee to a complying superannuation fund, are not fringe benefits.
However, superannuation contributions made for an associate, such as your spouse, are a fringe benefit. Similarly, contributions paid to a non-complying superannuation fund will be a fringe benefit.
What are the implications of entering into an arrangement?
As an employee you need to be aware how entering into a salary sacrifice arrangement with your employer will affect you. Under an effective arrangement:
you pay income tax on the reduced salary or wages
your employer may be liable to pay FBT on the fringe benefits provided
salary sacrificed superannuation contributions are classified as employer superannuation contributions (rather than employee contributions) and are taxed in the superannuation fund under tax laws dealing specifically with this subject
your employer may be required to report certain benefits on your payment summary following information may provide you with some guidance.