One of the most essential tools in business and payroll management in Australia is what we call “Salary Packaging.” This is becoming increasingly popular as it provides employees with a way to increase their take-home pay and improve their overall financial position. Here are 5 things to learn about salary packaging.
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How does Salary Packaging Work?
Salary packaging in Australia refers to an arrangement between an employer and employee where a portion of the employee's pre-tax salary is allocated towards various benefits or expenses, such as:
- car leases,
- mortgage repayments, or
- even personal expenses like childcare fees.
These benefits are exempt from income tax, which can result in significant tax savings for the employee. However, it's worth noting that the amount of salary that can be packaged is limited, and the types of benefits that can be packaged may also vary depending on the employer's policy and the employee's occupation.
Employers may also benefit from offering salary packaging. This can be used as a recruitment and retention tool to attract and retain high-quality employees. If you're a payroll or HR professional, our Salary Packaging & FBT Training course is perfect for you.
Salary Packaging vs. Salary Sacrifice
If you’ve also heard about ‘Salary Sacrificing,’ it’s the same thing as salary packing. Both carry the same total renumeration packaging concept in Australian Tax Law.
In simpler terms, they all refer to an arrangement where an employee agrees to forgo a portion of their pre-tax salary in exchange for certain benefits or expenses. This can result in significant tax savings for the employee, as the sacrificed amount may not be subject to income tax. Note in some instances the business is liable for the tax, known as Fringe Benefits Tax (FBT)
What is Novated Leasing?
One of the most utilised salary packaging arrangements is novated leasing where an employee leases a car through their employer, with the lease payments being deducted from their pre-tax salary.
The employer takes responsibility for the lease payments, while the employee is responsible for the vehicle's running costs. At the end of the lease, the employee can choose to purchase the vehicle outright or trade it in for a new lease.
What is Salary Sacrifice Superannuation?
This is another type of salary packaging arrangement that allows employees to contribute a portion of their pre-tax salary towards their superannuation account which is a long-term savings plan designed to provide income for retirement.
By packaging a portion of their salary towards superannuation, employees can reduce their taxable income and potentially increase their retirement savings. However, there are limits to the amount of pre-tax salary that can be contributed to superannuation each financial year.
What about Fringe Benefits Tax?
In addition, some of the benefits employers can incorporate in a salary packaging arrangement may be subject to fringe benefits. These benefits can include things like company cars, health insurance, and low-interest loans.
Employers are required to pay Fringe Benefits Tax (FBT) to ensure compliance with Australian tax laws. This is separate from income tax and is calculated based on the taxable value of the benefits provided.
Salary packaging requires effective arrangement and tax management to ensure that both employers and employees receive fair remuneration and comply with Australian tax laws.
If you want to learn how to manage salary packaging remuneration, employee benefits and pay less tax, you can enrol to our Salary Packaging & FBT Training. This comprehensive course will update you on the latest in remuneration management for staff at all levels including the most recent ATO rates and rulings for FBT.
