What is a salary sacrifice arrangement?
A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. It is an arrangement between an employer and an employee, where the employee agrees to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar value.
Agreement between you and your employer
It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement. The contract is usually in writing, but may be a verbal one. If you enter into an undocumented salary sacrifice arrangement, you may have difficulty establishing the facts of your agreement. Subject to the terms of any contract of employment or industrial agreement, employees can renegotiate a salary sacrifice arrangement at any time. Where you have a renewable contract, you can renegotiate amounts of salary or wages to be sacrificed before the start of each renewal.
No access to sacrificed salary
The sacrificed salary must be permanently forgone for the period of the arrangement. If a fringe benefit that has not been provided is cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is salary and is taxed as normal income.
Salary and wages, leave entitlements, bonuses or commissions that accrued before the arrangement was entered into cannot be part of an effective salary sacrifice arrangement.
Similarly, if you direct your employer to make payments to a third party from salary that has been earned, for things such as health insurance premiums, loan repayments, union fees or credit card repayments, these payments do not constitute an effective salary sacrifice arrangement. They are made from after-tax or net amounts of salary.
What types of benefits can be included?
There is no restriction on the types of benefits that can be sacrificed. The important thing is that these benefits form part of your remuneration, replacing what otherwise could have been paid as salary. The types of benefits generally provided in salary sacrifice arrangements by employers include fringe benefits, exempt benefits and superannuation.
Common fringe benefits include:
• property (including goods, real property such as land and buildings, and shares or bonds)
• expense payments (such as the payment of your loan repayments, school fees, child care and home phone costs).
A number of benefits are exempt from FBT. The following work-related items commonly provided in salary sacrifice arrangements are exempt benefits:
• a portable electronic device
• an item of computer software
• an item of protective clothing
• a briefcase
• a tool of trade.
Salary sacrificed superannuation contributions under an effective salary sacrifice arrangement are considered to be employer contributions which, when paid for an employee to a complying superannuation fund, are not fringe benefits.
However, superannuation contributions made for the benefit of an associate, such as your spouse, are a fringe benefit. Similarly, contributions paid to a non-complying superannuation fund will be a fringe benefit.