Salary sacrifice benefits, also referred to as salary packaging is an arrangement between an employer and an employee.
What is Salary Sacrifice Packaging and Salary Packaging?
“Salary packaging” is the term used to refer to the process of structuring an employee’s total remuneration in such a way that it is most valuable to the employer and employee and at a minimum cost to the employers.
In other words, Salary packaging means that instead of cash an employee may opt to receive part of their salary as a non-cash benefit such as superannuation. Salary packaging may also be referred to as salary sacrifice or flexible remuneration.
In many cases, employees can choose whether to take part of their pay either by cash salary or a combination of cash and non-cash type benefits such as motor vehicles and superannuation.
These non-cash benefits are chosen in lieu of salary or wages.
The overall package can take a variety of forms, including:
- The provision of goods and services to the employee
- The payment of expenses on behalf of the employee
- Contributions to superannuation funds
- Company shares/options
The benefits are that non-cash benefits are taken out of the salary payment before the payment of tax.
This also means the employee pays income tax on a lower amount and pays less tax.
What are the Salary Packaging Models?
Gross Wages plus Benefits for Salary Packaging
The employer pays an employee a base salary plus benefits. Any additional costs such as FBT, motor vehicles cost, fuel, running costs and other benefits like laptops are all supplied and paid for by the employer.
This makes it difficult to get an accurate cost or value of the employees package.
Total Employment Cost Model for Salary Packaging
This method uses the total package as a limit and is used by the overwhelming majority of employers.
The components of the package are determined in order to calculate the overall cost to the employer of the employee’s remuneration. The total package includes salary, benefits provided, superannuation (compulsory and salary sacrifice*) and any FBT payable. The total cost usually does not include employment on costs such as administration, payroll tax and workers compensation.
Importance of Managing Payroll
This is where the importance of managing payroll and processing salary packaging comes into frame. Payroll tax is payable only on the reduced salary on which the employee pays income tax, not the amount sacrificed for that benefit. the employer may be liable to pay fringe benefits tax on the fringe benefits provided.
One of the most important tasks in running a small business is completing payroll. Employees need to be able to rely on being paid on a consistent basis without delays. Payroll affects every aspect of a small business from the morale of employees to the financial stability of the company. To learn more on the industrial regulations and taxation systems relevant to payroll, check out our Diploma of Payroll Services online course.
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