How does salary sacrifice work?
Salary sacrifice super (ss) (one type of salary packaging) is an arrangement between you and your employer where you pay for some items or services straight from your pre-tax salary. You can salary package super, computers, cars, and childcare, for example. This can reduce your taxable income and put more money in your pocket.
Your employer pays fringe benefits tax (FBT) on the benefits provided to you. Some of these benefits will be listed on your end-of-year payment summary and are used to assess your Medicare levy surcharge, tax offsets, child support payments and other government benefits.
You must enter into a salary sacrificing arrangement before you earn the income. It can never be retrospective.
For more on Salary Sacrifice in general see Money smart.
Employer Contribution or Fringe Benefit?
Salary sacrificed super contributions under an effective salary sacrifice arrangement are considered to be employer contributions. These are not fringe benefits when paid for an employee to a complying super fund.
However, super contributions made for the benefit of an associate, such as your spouse, are a fringe benefit. Similarly, contributions paid to a non-complying super fund will be a fringe benefit.
As an employee, you need to be aware of how entering into a salary sacrifice arrangement with your employer will affect you. For instance:
- You pay income tax on the reduced salary or wages.
- Your employer may be liable to pay FBT on the non-cash benefits provided.
- Your employer may be required to report certain benefits on your income statement or payment summary.
- Your salary sacrificed super contributions are taxed in the super fund and are classified as employer super contributions, rather than employee contributions.
- Your salary sacrificed super contributions cannot be used to reduce the minimum amount of SG your employer needs to pay for you (from 1 January 2020).
- Accessing your payment summary or income statement
- To check your award or agreement, contact Fair Work Commission.
Your salary sacrifice contribution is counted towards your employer contributions.
Therefore, salary sacrificed super contributions are generally taxed concessionally at 15% in the super fund.
From 1 January 2020, salary sacrificed super contributions will not:
- Reduce the ordinary time earnings that your employer is required to calculate your super entitlement on;
- Count towards the amount of super guarantee contributions that your employer is required to make for them to avoid the super guarantee charge.
Prior to 1 January 2020, your employer could use salary sacrificed super contributions to reduce both the earnings amount your super guarantee entitlement is calculated on as well as satisfying all or part of their compulsory super guarantee contributions for you.
It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement.
For more see the ATO website Salary Sacrifice.
SuperBenefit works with SMSF trustees to CONNECT them with the advisors they need.
If you have any questions, why not give us a call – it’s FREE!
No obligation. 0407 361 596, Paul