The Employer’s Handbook to Salary Sacrificing in Australia

In the competitive landscape of modern business, attracting and retaining top talent is more crucial than ever. One effective strategy that Australian employers can leverage is salary sacrificing.  

Salary sacrificing, also known as salary packaging, allows employees to allocate a portion of their pre-tax salary towards various benefits, such as superannuation, vehicles, or electronic devices. For employers, this not only enhances employee satisfaction and retention but also offers potential tax advantages.  

Whilst on the surface this may seem like a win-win solution, there are a few drawbacks & conditions to take into account when considering offering salary sacrificing. 

In this handbook, we will explore the key benefits of salary sacrificing, outline best practices for implementation, and provide practical tips to ensure both employers and employees can maximise the advantages of this arrangement.

Understanding Salary Sacrificing

Salary sacrificing is a financial arrangement where employees choose to receive less take-home salary in return for benefits. This practice is known as salary packaging in Australia. It can help employees manage their finances more effectively. 

Benefits of Salary Sacrificing 

The primary advantage of salary sacrificing is that it allows employees to reduce their taxable income, potentially resulting in significant tax savings. 

For employers, offering salary sacrificing can be a powerful tool to enhance employee compensation packages without increasing overall salary costs. It can also help attract and retain talent by providing employees with flexible options to manage their finances more effectively.

However, it’s essential for employers to understand the legal and tax implications of salary sacrificing arrangements to ensure compliance and maximise the benefits for both the business and its employees.

Types of Salary Sacrifice Options

As an employer, offering a variety of salary sacrifice options can significantly enhance your employee benefits package, making your organisation more attractive to current and potential employees. Here are some popular salary sacrifice options in Australia that you can consider: 

Superannuation Contributions

One of the most common salary sacrifice options is additional superannuation contributions. Employees can choose to allocate extra contributions to their superannuation fund, which not only boosts their retirement savings but also takes advantage of lower tax rates on super contributions. This option is highly valued by employees looking to secure their financial future.

Novated Leases for Cars

Another popular option are novated leases, which is a tri party agreement between the employer, employee & the novated leasing company. Novated leases allow employees to lease a vehicle using their pre-tax income. This arrangement can provide significant tax savings and is an attractive benefit for employees who need a car for personal or business use. As an employer, you partner with leasing companies to offer competitive lease packages.

Electronic Devices

Depending on your company’s policies, you can offer salary sacrificing for electronic devices such as laptops, tablets, and smartphones. This benefit is particularly appealing to employees who need the latest technology for their work or personal use. Ensure that the devices are primarily for work-related purposes to comply with tax regulations. 

Fringe Benefits

You can also include various fringe benefits in your salary sacrifice offerings. These might include payment of expenses such as loan repayments, school fees, or childcare costs. Be aware that some fringe benefits may attract Fringe Benefits Tax (FBT), so it’s important to understand the tax implications and communicate them clearly to your employees. 

Exempt Benefits

Certain work-related items, such as portable electronic devices, computer software, protective clothing, and tools of trade, can be provided as exempt benefits. These items are typically exempt from FBT if they are primarily used for work purposes.
 

By offering a diverse range of salary sacrifice options, you can tailor your benefits package to meet the varied needs and preferences of your employees. This not only enhances employee satisfaction and retention but also positions your organization as a forward-thinking and employee-centric employer.
 

Tax Implications & Limitations 

Salary sacrificing can impact taxes significantly, so understanding these effects is crucial. A key consideration is Fringe Benefits Tax (FBT), which applies to many salary sacrifice benefits. While some items like superannuation contributions are FBT-exempt, others might attract this tax, affecting the net benefit. 

FBT exemptions exist, providing valuable opportunities to maximise savings. For instance, benefits such as work-related items or those falling under certain caps can be exempt. It’s important to consult with financial advisors to navigate these exemptions effectively. 

Contribution caps are another limitation to keep in mind. These caps dictate the maximum amount that can be salary sacrificed, especially into superannuation. Exceeding these limits can result in excess contributions tax, negating the intended tax advantages. 

Monitoring these factors ensures you stay compliant while optimising your salary sacrificing benefits.

Potential Downsides & Misconceptions

While salary sacrificing can offer significant benefits, it’s important for employers to be aware of potential downsides and common misconceptions to ensure a well-informed implementation. 

Potential Downsides 

• Administrative Burden: Implementing and managing salary sacrifice arrangements can require significant administrative effort. Employers must adjust payroll systems, ensure compliance with tax regulations, and manage ongoing monitoring and reporting. 

• Impact on Employee Benefits: Salary sacrificing can affect employees’ entitlements to certain benefits, such as statutory maternity pay, sick pay, and redundancy payments, which are calculated based on gross earnings. This can lead to dissatisfaction if not communicated clearly. 

• Fringe Benefits Tax (FBT): Some salary sacrificing benefits, such as car leases, may attract FBT, which can offset the tax savings for both the employer and the employee. It’s crucial to understand the FBT implications and manage them effectively. 

• Credit and Mortgage Applications: A reduced gross salary due to salary sacrificing can impact employees’ ability to secure loans or mortgages, as lenders often assess borrowing capacity based on gross income. 

• High Staff Turnover: If an employee leaves the company, managing ongoing lease payments or early termination charges for benefits like car leases can be challenging and costly. 

Common Misconceptions 

• “Salary Sacrificing Always Reduces Take-Home Pay”: While salary sacrificing reduces gross salary, it may result in higher take-home pay due to lower tax withholding. Employees may actually see an increase in their net income. 

• “All Benefits Are Subject to FBT”: Not all salary sacrificing benefits attract FBT. Certain work-related items, such as laptops and protective clothing, can be exempt from FBT if they are primarily used for work purposes. 

• “It’s Only Beneficial for High-Income Earners”: Salary sacrificing can benefit employees at various income levels. For example, additional superannuation contributions can be advantageous for employees looking to boost their retirement savings, regardless of their income. 

• “It’s Complicated and Not Worth the Effort”: While setting up salary sacrifice arrangements requires effort, the long-term benefits for both employers and employees can outweigh the initial complexity. Proper planning and clear communication can simplify the process. 

By understanding these potential downsides and misconceptions, employers can better navigate the complexities of salary sacrificing and implement arrangements that are beneficial and transparent for all parties involved.

Salary Sacrificing Best Practices

When setting up salary sacrifice arrangements, it’s essential to follow best practices to ensure a smooth and beneficial process for both employers and employees. Here are some key tips to keep in mind: 

• Employee Consent: Ensure that employees fully understand and agree to the terms of the salary sacrifice arrangement. This includes providing clear information about how their salary will be adjusted and the benefits they will receive in return. 

• Compliance with Legal Requirements: Verify that the salary sacrifice arrangement complies with all relevant legal and tax regulations. This includes ensuring that the arrangement does not reduce an employee’s salary below the National Minimum Wage. 

• Impact on Other Benefits: Consider how the salary sacrifice arrangement might affect other employee benefits, such as superannuation, leave entitlements, and insurance coverage. Make sure employees are aware of any potential changes. 

• Regular Reviews: Conduct regular reviews of the salary sacrifice arrangements to ensure they remain beneficial and compliant with current laws. This includes updating agreements as necessary to reflect any changes in legislation or company policy. We recommend this it done at least annually. 

• Clear Documentation: Maintain clear and detailed documentation of all salary sacrifice agreements. This should include the terms of the arrangement, the benefits provided, and any changes made over time. 

• Communication: Keep open lines of communication with employees regarding their salary sacrifice arrangements. Provide them with regular updates and be available to answer any questions they may have. 

• Payroll Adjustments: Ensure that your payroll system is set up to handle salary sacrifice arrangements correctly. This includes making the necessary adjustments to calculate tax and superannuation contributions accurately. 

By adhering to these tips, you can create a robust and effective salary sacrifice program that benefits both your organisation and your employees.

Conclusion: Weighing the Pros and Cons

In conclusion, salary sacrificing can be a powerful tool for both employers and employees when implemented thoughtfully and strategically. By offering a range of salary sacrifice options, employers can enhance their benefits packages, attract and retain top talent, and potentially achieve tax savings. However, it’s crucial to weigh the pros and cons carefully. 

Employers must ensure compliance with legal requirements, maintain clear communication with employees, and regularly review and adjust salary sacrifice arrangements to keep them beneficial and compliant. Understanding the potential downsides and addressing common misconceptions can help create a transparent and effective salary sacrifice program. 

Ultimately, understanding and implementing salary sacrificing can be complex for businesses. This is where payroll outsourcing services become invaluable.  

By outsourcing your payroll, businesses can reduce administrative burdens and focus on their core operations, while their employees enjoy the financial advantages of well-managed salary sacrificing. We ensure that salary sacrifice arrangements are set up correctly, compliant with tax regulations, and optimised for maximum benefit. 

Keen to find out more? Reach out to our experts today!