What is salary packaging?
Salary packaging is using part of your salary to pay for certain expenses before your income tax. This may benefit you as it can reduce your taxable income.
How does salary packaging work?
When salary packaging occurs, you and your employer 'package' your salary into income and benefits, depending on how you want to use your benefits.
For example, you might package a salary of $100,000 so that you receive:
- $80,000 as income
- $20,000 car as a benefit
This reduces your taxable income to $80,000. As a result, you may pay less income tax.
You need to arrange your salary package prior to getting paid. You cannot package your salary after earning it.
What can you salary package?
You can receive salary package benefits you would usually pay for with your after-tax income. This can be items such as cars, computers, child care or super. However, it depends on what your employer offers and you may have to pay tax.
Most employers will offer salary sacrifice for super to all employees but may restrict which employee can package other benefits.
The three categories benefits fall under are fringe benefits, exempt benefits and super.
Fringe benefits can include:
- school fees
- childcare fees
- other personal expenses
- salary sacrifice for a car
- health insurance
- loans (usually for a car)
Your employer will have to pay fringe benefits tax (FBT) on these benefits.
Exempt benefits include:
- portable electronic devices
- computer software
- protective clothing
- tools of the trade
Your employer will not have to pay fringe benefits tax on these.
When you put pre-tax income into your super, it benefits both you and your employer. Your super fund will tax these contributions at 15 percent, which will be the same for your employer’s contributions.
For most income earners, this will be lower than their marginal tax rate. This means you will pay less tax while increasing your retirement savings.
It is worthy to note that the combined total of your employer and salary sacrificed contributions must not be more than $25,000 per financial year. Beginning July 1st 2021, this will increase to $27,500 per financial year.
For people on middle to high incomes, salary packaging is usually more effective. Contact Wagtail Wealth today if you want to get professional tax advice to figure out if salary packaging is right for you.
IMPORTANT NOTE: This information is general advice only and does not take into account your personal circumstances, goals and objectives. Therefore, you should consider its appropriateness for your circumstances before acting on this information.