If you’re saving for your first home or wanting to boost your retirement savings, salary sacrificing could help put money back into your pocket.
When it comes to salary sacrificing, it can be overwhelming to think about what you’re missing out on, where to start or if it is the right choice for you. With different rules for different workplaces and occupations, we’ve explained the ins and outs of salary sacrificing to help you decide what’s best for your situation.
What is salary sacrificing?Salary sacrificing – sometimes salary packaging or total remuneration packaging – is a way to reduce the amount of tax you pay. It works by removing goods and services you would normally pay for, but instead from your pre-tax salary. By doing this, you can reduce your taxable income because, in the eyes of the Australian Taxation Office, you are earning less.
Who can salary sacrifice?
Whether you can salary sacrifice and how much depends on your employer. Salary sacrifice arrangements are typically done in a formal contract but can sometimes be made verbally. It is recommended though, you formally agree on any terms so as not have difficulty establishing facts should something go wrong.
This arrangement between an employer and employee must be done before you begin getting paid – but an exception applies to your super. This contract will state your remuneration alongside your salary sacrifice sum. And, if you think up a new expense which could work, you can renegotiate a deal at any time.
Some industries, including public health, not-for-profits and charities, often have added salary packaging extras. If you work in one of these industries be sure to ask about the added incentives and fill out the necessary paperwork to claim the maximum amount – which changes depending on your job.
For employees of public health, benefits allow you to reduce your taxable income by $9,010 per fringe benefits tax and spend it all on general benefits. On top of this, workers also have access to a Meal and Entertainment allowance of $2,549, which can be claimed.
Charity and not-for-profit employees have an even wider range.
What can I use salary sacrifice for?
The value of the benefits will appear on your payment summary at tax time. You will not need to pay tax or Medicare levy on this amount.
Some common expenses that can be paid for under a salary sacrificing agreements include:
- Electronic devices
- School fees
- Health insurance
Some things to remember for electronic devices:
- The device must be portable, so a desktop computer doesn’t count. Laptops and phones are fine.
- For at least 51% of the time, the device needs to be for business purposes.
Salary sacrificing super
While the thought of sacrificing more of your income may hurt, there are attractive advantages to sacrificing money into your super. And, this arrangement can be a good way to reduce tax on your super contributions, for example.
Salary sacrifice contributions are taken from your pre-tax salary, meaning you will only pay 15% tax when they enter the super system – if you earn less than $250,000. If you’re earning over 250K, this becomes 30%.
This is a lower tax rate than most employees pay on their income, which can be as steep as 47%.
Can I salary sacrifice my mortgage?
If your place of work salary sacrifices, then you need to be certain it’s for you before you opt-in. Factors you’ll need to consider are:
- Australian Taxation Office rulings: Check with the ATO to ensure that you’re eligible to salary sacrifice your home loan.
- Loan type: Salary sacrificing your mortgage is only available for an owner-occupied home. So, if your property is an investment, then you’ll need to look at other options.
- Lender approval: You’ll need to ask your lender if they accept salary sacrificing. Not all lenders will accept this form of payment for a loan. So, if this is what you want, then you may need to shop around for another lender and refinance your existing loan.
- Employer approval: Ask your employer or human resources department if you can salary sacrifice your home loan. If it is possible, then make sure you ask if this will affect your superannuation or any other payments.
- Contact your accountant: Making a decision without professional advice can be costly. So, contact your accountant and ask them about salary sacrificing your mortgage.
What are the benefits to salary sacrificing?
There are many benefits to salary sacrificing. These are as follows:
- You’ll pay less tax: If you earn a sizeable income, then salary sacrificing your home loan reduces your taxable income. Therefore, you’ll pay less tax at the end of the financial year.
- Reduce your interest repayments: Paying your mortgage before tax means you can increase repayments and reduce your interest further. This tactic will pay off your mortgage faster.
- Increase your disposable income: With less tax and your mortgage already paid for, you might have more disposable income. You can use this to save for a holiday or a new car, or – if you really want to get ahead – you can pay even more off your home loan.
- Convenience: Directly paying your mortgage from your salary means you no longer manage the payment yourself. This option frees-up your time and removes the stress of home loan repayments. Plus, you’re paying off your home without even realising it’s happening.
Are there any pitfalls to salary sacrificing?
With benefits come disadvantages. The pitfalls of salary sacrificing are:
- Employer refusal: Not all employers offer salary sacrificing. Some believe it will be too time-consuming and costly to establish. However, this is typically not the case. So, it could be up to you to convince them.
- Employer limits: Not all employers will allow you to salary sacrifice all your mortgage repayment. Some employers have a limit. Therefore, you’ll need to check if you can salary sacrifice enough.
- Less superannuation: As salary sacrificing reduces your income, your mandatory superannuation payments will also decrease. Therefore, you’ll need to assess the impact on your retirement savings or even salary sacrifice super contributions.
- Fees: Some employers will charge you an administration cost to cover the setup of your salary sacrifice arrangement, so you’ll need to ask about this cost.
- Don’t be tricked: Although it can be a useful tool to reach your financial goals, don’t be roped into paying for something you don’t need – you’ll be poorer no matter how much you’re saving.
- It might affect current benefits: When you save money by salary sacrificing, you also change your salary. Check if salary-related benefits – such as holiday loading and overtime – are affected. If you want to protect these benefits, consult your employer and try and negotiate.
- You can’t claim deductions or tax offsets on the sacrificed amounts.
Where to get advice
ASIC’s MoneySmart and the Australian Taxation Office can be great resources to gain more insight into salary packaging and salary sacrificing for superannuation.
Network: We also suggest talking to someone in your network, whether it be colleagues or family, to gain advice from past experience.
Advice: You can get advice on your specific circumstances from a financial advisor, and sometimes even your employer or super fund.
Salary packaging calculators: These can help give an estimation of potential savings made from the agreement.
Do you want to know more about salary sacrificing your home loan? Contact eChoice to find out if you’re eligible. Our brokers also have access to hundreds of home loan products, so we’ll help find the right mortgage for you.