MB+M Tax Team looks at how to: cut your tax and boost your Super – Salary Sacrifice

This time of year, people’s thoughts start turning to their tax return, but it can also be a good time to set things up so you don’t pay more tax than required next financial year.

Simply talking to your employer about setting up an arrangement to “sacrifice” some of your pre-tax salary could potentially lower your tax bill – and boost your retirement nest-egg.

Reducing your tax bill

Although it can sound complicated, a salary sacrifice arrangement simply involves coming to an agreement with your employer to pay for everyday items or services you would normally pay for out of your after-tax salary directly from your before-tax salary. This might include things like childcare, health insurance or super. The benefit is that this reduces the level of income the ATO uses to calculate your tax bill.

Salary sacrifice arrangements deliver the biggest benefit to people on mid to higher incomes as it has the potential to reduce their tax-assessable income the most, but anybody can use them.

If you set up a salary sacrifice arrangement with your employer, it’s important to understand that while your taxable income is lower, the benefits are still listed on your annual payment summary. For some people, this reduces the tax offsets, child support payments or other government benefits they receive, limiting the value of salary sacrifice.

Salary sacrificing options

The items or services you can pay for using salary sacrifice depends on your employer.

Some employers are prepared to let their employees salary sacrifice for expenses such as cars, health insurance, school fees and home phones. Others are not prepared to do this, as they may end up paying Fringe Benefits Tax (FBT) on the benefits you receive.

Employers are usually more willing to allow you to package FBT-exempt work-related items such as portable electronic devices, computer software, protective clothing or tools of trade, as these generally don’t result in FBT bills.

Boost your Super account

One of the most common forms of salary sacrifice is redirecting some of your pre-tax salary into your super fund. Most companies are willing to provide this option as it not only helps you build your retirement savings, but it can also earn them a tax deduction.

When you salary sacrifice into your super, your contributions are taxed at 15 per cent when your super fund receives the money. For most people this is a lower tax rate than if they received the money as normal income.

A further bonus with salary sacrificing into super is you only pay 15 per cent on any investment earnings you receive inside super, instead of your marginal tax rate for investments held outside super.

Find out what’s on offer

If you’re interested in a salary sacrifice arrangement, it’s a good idea to discuss the subject with your employer or HR team to find out the company’s policy.

It’s also a good idea to talk to MB+M before signing a salary sacrifice agreement, as the value of these arrangements needs to be weighed up carefully against your reduced take-home pay and the potential loss of government benefits.

These arrangements should be put in writing before you earn the income you are sacrificing, so you need to talk to your employer prior to the start of the new financial year if your salary will change from 1 July.

If you would like help working out if a salary sacrifice arrangement makes sense for you, call MB+M on 03 5821 9177 today.

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Published 11 May 2022.
The information provided in this article is general in nature only and does not constitute financial advice.