Effective salary packaging can be a powerful tool for attracting and retaining quality staff, while also providing tax and cash flow benefits for both employers and employees. However, the rules can be complex, and the benefits will depend on your income level, the type of employer, and the specific arrangements in place.
What is Salary Packaging?
Salary packaging (or salary sacrificing) is an arrangement between an employee and an employer where part of the employee’s gross salary is exchanged for benefits provided on their behalf. These benefits are paid for with pre-tax dollars, reducing the employee’s taxable income and potentially lowering their tax liability.
Common benefits that can be included are:
- Motor vehicle leasing and/or running costs
- Insurance premiums
- Laptops and other portable devices
- Mortgage or rent payments
- Childcare fees
- Superannuation contributions
For middle to high-income earners, salary packaging can be particularly effective in reducing taxable income and increasing take-home value, provided the arrangement is structured correctly.
Changes to Superannuation Salary Sacrifice
Changes to legislation changes mean that salary packaging for superannuation contributions is no longer essential for most people. Individuals can now claim a tax deduction for personal concessional super contributions made from after-tax dollars, regardless of their employment status.
While salary sacrificing to super remains available and can still be tax effective, contributions are locked away until you meet a condition of release, so the strategy needs to be considered in light of your overall financial goals, age, and cash flow needs.
Employer Considerations and Fringe Benefits Tax
Fringe Benefits Tax (FBT) is a tax imposed on employers for providing certain non-cash benefits to employees. For most businesses, this means some benefits will be less attractive due to the 47% FBT rate on their taxable value.
However, some employers – particularly in the not-for-profit and health sectors – enjoy significant FBT exemptions or concessions. These include:
- Registered public benevolent institutions
- Registered health promotion charities
- Public and non-profit hospitals
- Public ambulance services
These organisations can offer employees FBT-free benefits up to certain caps ($30,000 or $17,000 depending on the employer), meaning expenses like mortgage or rent payments can be packaged with no additional tax implications. This can provide substantial value to employees, regardless of income level.
For other employers, FBT costs may limit the benefits that can be packaged, and care must be taken to ensure the arrangement still results in a net gain for both parties.
Making Salary Packaging Work in Practice
For salary packaging to be effective, it must be:
- Agreed in writing before work is performed – Packaging arrangements can’t be backdated.
- Structured to reduce taxable income – Greater tax savings occur when packaging brings an employee into a lower tax bracket.
- Designed with FBT in mind – Some benefits are exempt (like superannuation), while others have special valuation rules (like motor vehicles).
- Tailored to the employee’s circumstances – The mix of benefits should reflect the employee’s income level, financial goals, and access to exemptions.
The Business Case for Offering Salary Packaging
Providing access to salary packaging can be a valuable tool for businesses looking to:
- Stand out in competitive recruitment markets
- Improve employee satisfaction and retention
- Help employees stretch their income further
- Offer non-cash perks without necessarily increasing payroll costs
It’s not just a tax strategy – it’s also a way to position your business as an employer of choice, especially when competing for skilled staff.
Bringing It All Together
Salary packaging can deliver tangible financial benefits, but its value depends on the specific benefits offered, the employee’s income level, and the employer’s FBT status. For some, packaging a vehicle or housing costs could be highly effective. For others, superannuation contributions or other exempt benefits may offer the most advantage.
Because the rules are complex and the potential savings vary, it’s important to get tailored advice before committing to any arrangement. Accru can help you assess your options, calculate the potential benefits, and ensure any salary packaging agreement works for both you and your employees.
