salary sacrifice superannuation

Understanding tax and salary sacrifice for superannuation

14 Nov, 2016

Employers often offer their employees a salary sacrifice arrangement whereby a portion of their salary or wages is given up in return for certain benefits, including superannuation contributions and fringe benefits such as company cars, private health insurance and other expense payments.

There is no limit on the amount or type of benefits that can be included in this kind of arrangement, as long as they form part of your remuneration.


Implications of salary sacrificing for employees

If you have a salary sacrifice agreement in place it means:

  • You still pay income tax on the reduced salary or wages
  • Your employer may be liable to pay fringe benefits tax (FBT) on the non-cash benefits they provide and it’s likely they’ll pass the cost on to you via a salary reduction
  • You’ll pay less tax on salary-sacrificed superannuation contributions than you would on the same amount in income tax since these contributions are classified as employer contributions rather than employee contributions
  • You can’t get your sacrificed salary back; it must be permanently forgone for the period of the arrangement
  • Some of the benefits your employer provides may need to be disclosed in your annual income tax return


Weighing up the pros and cons

You’ll generally get the greatest tax benefits from salary sacrifice in the form of superannuation, exempt fringe benefits and some car fringe benefits.

Any superannuation contributions made under a salary-sacrifice arrangement are classed as employer contributions and are taxed at 15% (increasing to 30% for individuals with income over $300,000), subject to contribution limits. This can be more tax-effective than paying income tax on your salary, especially if you are on the highest marginal tax rate of 49%.

If you are a high-wealth individual and you run your own business via a company structure, you may be able to keep your income under the $300,000 threshold by holding funds inside the corporate entity instead of taking a wage or dividend for yourself. If you do need to exceed the threshold, try to plan it so you take the hit in one financial year but stay below the threshold the rest of the time.

You should pay less income tax under a salary-sacrifice arrangement than you would otherwise. However, there are other considerations which may offset that saving. Work out whether the benefits on offer are truly worth the amount you’re giving up, and whether there are any surcharges which may arise as a result of the benefits.

If you salary sacrifice your super, this will result in a reduction in your earnings base – on which your compulsory superannuation contributions are calculated – although it may be possible for you to avoid this as part of your agreement.

Read more about how salary sacrifice works in practice.


Documenting your salary sacrifice arrangement

You may have a verbal agreement in place with your employer, but for tax auditing purposes it’s better to get everything in writing. If the ATO starts asking questions, it can be hard to prove anything that was only agreed verbally. You should document the agreement before you start work, so your employment contract is a good place to get the details down on paper.

The agreement can be re-negotiated at any time, but do make sure any changes are documented.


To sum up:

  • You may have a salary sacrifice agreement in place with your employer in which you forego a portion of your salary in return for various benefits
  • This can offer greater tax benefits, particularly if your agreement includes super contributions
  • If your income is over $300,000 you will be subject to higher tax rates, but there are ways around this if you run your own business
  • Although there are tax benefits from a salary sacrifice scheme, you need to look at the wider picture and make sure you’re not losing out elsewhere
  • It’s best to get any arrangement documented in writing, ideally in your employment contract. Make sure it’s updated with any changes.
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