Salary packaging or salary sacrifice is an added benefit that many employers provide for their employees. It can be a great way to save on the amount of taxes you owe at the end of the year.
However, salary packaging is not right for everyone. It is important that you understand how this process works before you determine whether it is the right opportunity for you.
What is Salary Packaging?
Salary packaging is an official agreement that you make with your current employer. The employer agrees to pay for certain benefits directly from your pre-tax income. Your employer also agrees to distribute these funds to the designated benefits, and you agree to have the amount deducted from your pay on a regular basis. Most employers are required to pay a fringe tax benefit on the amount of money paid toward these benefits.
Who is Salary Packaging For?
Typically, salary packaging is used by those people with middle to high income. However, anyone is eligible to enter into a salary packaging agreement, as long as their employer agrees. Some employers offer salary packaging only for those employees who want to make contributions into the superannuation account, while other employers provide this service for a whole range of benefits. Unfortunately, there are still some employers who do not participate in salary packaging at all.
Different Types of Benefits
There are many different types of benefits that can be included under a salary packaging plan. These benefits are divided into three different types: fringe benefits, exempt benefits, and contributions to your superannuation account. There really are no types of restrictions on what can and cannot be included as a benefit.
- Fringe Benefits. These are special benefits offered by employers as part of your employment package. This may include a loan for things like cars, childcare fees, education costs, and medical expenses. Most of the time these benefits are reported on your year-end payment summary report.
- Exempt Benefits. These are special benefits for which your employer does not need to pay any fringe benefit tax and are therefore not reported on your year-end payment summary report.
- Super Contributions. This includes payments made from your regular pay towards your superannuation account. These payments are made on a pre-tax basis, but are taxed by the super fund at a rate of 15 per cent. This may be able to lower your overall marginal tax rate for the year. There are specific limits to how much you can contribute to your super fund based on your age.
For people under the age of 60, the maximum contribution that can be made through your salary packaging, known as the concessional contributions cap, is $25,000 per year, which includes the 9.25 per cent that your employer contributes. If you are over 60-years-old, you can contribute up to $35,000 in a year, including your employer’s 9.25 per cent contribution. Beginning 1 July 2013, this age limit will be lowered to 50-years-old, allowing those over 50 to contribute up to $35,000.
How to Set up Salary Packaging
You can set up a salary packaging account directly through your employer. The account must be set up before earning the income. These types of accounts cannot be set up in retrospect, so you should talk to your employer at the time you are hired or when a new employment contract is made. Your employer will draw up a formal agreement that must be established between you and your employer. This is typically included as part of the terms of your employment. If you have questions about what your employer offers, you should speak to them directly.
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