How Does Salary Packaging Work in Australia?

Salary packaging, also known as salary sacrifice, is an arrangement in Australia where an employee agrees with their employer to receive a portion of their pre-tax salary as benefits instead of cash. This allows employees to pay for certain expenses or acquire items directly from their gross income, before income tax is calculated. The primary objective is to reduce an employee’s taxable income, which can lead to a lower overall tax liability. This practice is a common remuneration component offered by many Australian employers.

Core Concept of Salary Packaging

Salary packaging reallocates an employee’s gross salary. A predetermined portion is directed by the employer to pay for approved benefits or expenses before income tax is calculated and withheld, effectively reducing their assessable income for tax purposes. Salary packaging is a different method of structuring an employee’s existing remuneration, not an additional payment.

Employers facilitate these arrangements, often working with a third-party salary packaging provider. These providers manage administrative complexities, ensure compliance with Australian tax laws, and process payments for packaged items. The employee sacrifices a portion of their cash salary for the non-cash benefit, which is managed through the employer’s payroll system and the packaging provider.

Commonly Packaged Items

Many expenses and benefits are commonly eligible for salary packaging in Australia. These include:
Novated leases, where an employer facilitates vehicle lease payments from an employee’s pre-tax salary, covering finance, running costs, and fuel.
Superannuation contributions, allowing employees to contribute additional amounts to their superannuation fund.
Work-related expenses, such as laptops, professional memberships, and home office costs, provided they relate to work duties.
Self-education expenses that improve job-related skills.
Remote area housing benefits, like rent or mortgage interest payments, for employees in designated remote areas.
Meal entertainment expenses, subject to specific rules and limitations.

Employees in certain sectors, such as public benevolent institutions, health promotion charities, hospitals, and ambulance services, often access special Fringe Benefits Tax (FBT) exempt benefits. They can package living expenses, including mortgage repayments, rent, and utility bills, up to an annual cap. These concessions offer tax savings by allowing employees to pay for everyday living costs with pre-tax dollars. The availability and specific caps depend on the employer’s tax status.

Tax Considerations

Salary packaging directly impacts an employee’s taxable income, potentially leading to income tax savings. By directing a portion of gross salary towards approved benefits before tax, assessable income is reduced, resulting in less income tax. However, non-cash benefits often trigger Fringe Benefits Tax (FBT), which is a tax paid by employers on certain benefits. The FBT year runs from April 1 to March 31.

FBT applies to most packaged items. While it is an employer’s tax, its cost is frequently passed to the employee through reduced take-home pay or an “employee contribution.” This contribution, often made from post-tax salary, can reduce the fringe benefit’s taxable value to nil, thereby eliminating the employer’s FBT liability. Some items, like certain work-related expenses, might be exempt from FBT if specific conditions are met.

Certain industries, including not-for-profit organizations, public hospitals, and charitable institutions, benefit from FBT exemptions or concessions. These allow employers to provide more FBT-exempt benefits or benefits with reduced FBT liability. Employees of public benevolent institutions often have a tax-free cap for living expenses. A reduced assessable income from salary packaging might also influence eligibility for or repayment obligations concerning income-tested government benefits, such as Centrelink payments or higher education loan repayments.

Setting Up a Salary Packaging Arrangement

Initiating a salary packaging arrangement begins with an employee confirming if their employer offers this option. If available, the next step involves contacting the employer’s human resources department or the designated salary packaging provider. These entities can provide detailed information about specific policies and the approved list of items that can be packaged.

After understanding the available options, the employee completes the necessary application forms or an online process. This involves nominating the desired items to be packaged, such as a novated lease or specific work-related expenses, and providing any required supporting documentation. For instance, proof of expenses might be needed for items being reimbursed. Once the application is processed and approved, arrangements are made for the salary deductions to commence directly from the employee’s gross pay.

Ongoing management of the salary packaging arrangement may involve submitting claims for reimbursement of eligible expenses or reviewing regular statements provided by the salary packaging provider. These statements detail the deductions and benefits. Employees should periodically review their packaged items to ensure they continue to align with their financial goals and lifestyle.