Salary Packaging
What is Salary Packaging?
Salary packaging, also known as salary sacrificing, is an Australian Tax Office (ATO)-endorsed strategy that enables employees to optimise their earnings. By allocating a portion of their pre-tax salary towards specific expenses, employees can reduce their taxable income, increase their take-home pay and keep more of their income in their pockets.
Many hard-working Australians are utilising salary packaging as a means to help combat their rising cost of living, which has never been higher.
The benefits available to you through salary packaging depend on your employer’s tax classification, whether you’re full-time, part-time or casual, and what your employer chooses to offer.
Many employers offer novated leases for cars, additional superannuation contributions, and work-related benefits like tablets. Depending on the industry you work in, some also let you salary package mortgage or rent payments, and other everyday living expenses.
There are over 15 million employed Australians, of those around 14 million earn a salary above $20,000 per annum, and could benefit from salary packaging.
By leveraging salary packaging, employees can enhance their financial well-being while maximising the benefits of their employment and reducing their cost of living.
How Does Salary Packaging Work?
Typically, employers deduct tax before paying employees. With salary packaging, however, certain expenses—such as additional superannuation, work-related expenses and novated lease payments, are covered using pre-tax dollars. This effectively reduces taxable income, resulting in greater financial flexibility and increased disposable income.
Importantly different industries and employers offer different benefits. Salary packaged items are ‘fringe benefits’, which are added extras offered by your employer outside of your regular salary or wages, and attract Fringe Benefits Tax (FBT). Different industries are subject to different FBT regulations and some get exemptions or rebates on FBT. This means it costs them less to provide employees with certain benefits.
So, its important to check with your employer or salary packaging provider as to which benefits you may be able to claim.
Many employers in Australia collaborate with salary packaging providers to administer these benefits, ensuring a seamless and tax-efficient structure that benefits both employees and organisations.
Benefits for Employees and Employers:
For employees, one of the key benefits of salary packaging is the increase in their disposable income. By utilising salary sacrifice, you can effectively reduce your taxable income, resulting in lower tax payments and higher take-home pay. Salary packaging in Australia presents numerous advantages that can potentially strengthen your financial situation.
Below is an example of how much a charity worker earning $65,000 a year and salary packaging $15,900 of rent payments and $2,650 of meal costs per FBT year could potentially save:
Salary Packaging Comparison1
| Without salary packaging | With salary packaging | |
|---|---|---|
| Annual salary before tax | $65,000 | $65,000 |
| Pre-tax expenses | – | $18,550 |
| Taxable income | $65,000 | $46,450 |
| PAYG tax | $10,288 | $4,723 |
| Medicare levy | $1,300 | $929 |
| Annual salary after tax | $53,412 | $40,798 |
| Post-tax expenses | $18,550 | – |
| Net disposable income | $34,862 | $40,798 |
| Potential Annual saving | $5,936 | |
| Potential Fortnightly Saving | $228 | |
| Equivalent Salary | $73,730 | |
| % increase to take home pay | 17.03% |
1Calculations assume a charity worker on $65,000 packaging $15,900 of rent payments and $2,650 of meal costs per FBT year, using 2024/25 individual tax rates. The calculations do not take into account any applicable: low income tax offsets (LITO), low and middle income tax offsets (LITMO), low income Medicare levy reduction or any fees that may apply.
| Without salary packaging ($80k) | With salary packaging ($80k) | Without salary packaging ($150k) | With salary packaging ($150k) | |
|---|---|---|---|---|
| Starting gross salary | $80,000.00 | $80,000.00 | $150,000.00 | $150,000.00 |
| Salary sacrifice | – | ($15,900.00) | – | ($15,900.00) |
| New gross salary | – | $64,100.00 | – | $134,100.00 |
| Tax incl. Medicare | ($18,067.00) | ($12,581.00) | ($43,567.00) | ($37,366.00) |
| Net salary | $61,933.00 | $51,519.00 | $106,433.00 | $96,734.00 |
| Benefits received | – | $15,900.00 | – | $15,900.00 |
| Net take home amount | $61,933.00 | $67,419.00 | $106,433.00 | $112,634.00 |
| Dollar increase | – | $5,486.00 | – | $6,201.00 |
| Percentage increase | – | 8.85% | – | 5.82% |
Common Salary Package Inclusions
(depending on the industry/sector you work in and your employer):
Superannuation Contributions:
Employees can choose to sacrifice a portion of their salary to contribute to their superannuation fund, which can be tax-effective.
Childcare Expenses:
Many salary packages allow employees to cover childcare costs through pre-tax deductions, potentially saving on income tax.
Vehicle Expenses:
Employees can include car leases or novated leases as part of their salary package, allowing them to use a portion of their pre-tax salary to pay for vehicle-related expenses.
Work-Related Equipment:
Salary packages can cover the cost of laptops, phones, and other work-related equipment, which can be paid for with pre-tax dollars.
Private Health Insurance:
Premiums for private health insurance can be included in a salary package, reducing the amount of taxable income.
Rent or Mortgage Payments:
Some salary packages allow employees to pay for rent or mortgage payments using pre-tax income, subject to certain conditions and limits.
Meal and Entertainment Expenses
Employees can sometimes include meal and entertainment expenses in their salary package, although there are typically limits on the amount that can be packaged.
Other Expenses:
Depending on the employer and industry, other expenses like credit card payments, school fees, and even groceries can be included in a salary package.
For employers, offering a salary packaging program can be a cost-effective strategy to attract and retain high-calibre staff. It helps reduce recruitment costs, lower staff turnover, and increase employee satisfaction.
Employer Benefits:
Salary packaging is a valuable tool for attracting and retaining talent. Offering this benefit can reduce recruitment costs, minimise staff turnover and boost employee engagement and satisfaction, whilst enabling employees to boost the value of their remuneration at no cost to the employer.
Employers will be helping their employees make more from their hard-earned money, without needing to give them a pay rise, as they can potentially use their pre-tax income to pay for certain expenses that they’d normally pay from their take home pay. This can make them feel more valued and encourage greater loyalty. This approach not only lowers recruitment costs and staff turnover but also enhances overall employee satisfaction and engagement.
Importantly for employers by outsourcing their salary packaging requirements to a reputable provider, they are assured of full taxation compliance, the latest in products and services, no extra stress on payroll, less paperwork – all at no direct cost.
Implementing Salary Packaging:
Though implementing a salary packaging program may seem complex, partnering with a specialised provider simplifies the process. Expert providers handle administration, ensure compliance, and customise solutions to align with company policies, making salary packaging a seamless and cost-effective employee benefit.
By utilising the expertise of these providers, millions of Australian workers benefit from reduced taxable income and increased disposable income. Additionally, salary packaging providers can simplify expense management, allowing employees to optimise their finances without the added stress.
Salary Packaging FAQ
Salary packaging is an ATO approved way of paying for certain items before you pay income tax. The result is that you pay less income tax and increase your take-home pay.
In Australia, the Australian Tax Office (ATO) sets guidelines for what can be included in a salary packaging arrangement. Some of the most common benefits that can be salary packaged include:
- Meal and entertainment expenses
- Housing and rent expenses
- Vehicle expenses, such as servicing or car lease payments
- Loan and Credit card payments
It’s important to note that some benefits may be subject to Fringe Benefits Tax (FBT) and that there are limits and restrictions on the type and amount of benefits that can be salary packaged. It’s best to consult with a financial advisor or tax professional to determine the best salary packaging options for your individual circumstances.
The amount you can salary package depends on a variety of factors, including the type of employer you work for, the specific benefits you choose to include in your salary packaging and the Fringe Benefits Tax (FBT) year, which runs from April 1st to March 31st.
A capped benefits refers to the Fringe Benefits Tax (FBT) exemption that is available to certain employer types, which allows employees to salary package certain benefits (such as living expenses, mortgage, rent, credit card payments, utility bills and groceries) up to a set limit without paying FBT.
They essentially provide employees with the opportunity to reduce their taxable income by directing a portion of their salary into certain expenses, all while enjoying a set limit on the amount they can salary package without having to pay FBT. This results in a higher take-home pay for employees and more disposable income!
Cap limits refer to the total amount that employees can salary package for certain benefits without having to pay Fringe Benefits Tax (FBT). These limits vary based on the type of employer an employee works for.
There are three different types of employers:
- Health Employees (Public Hospitals, Ambulance Services): These individuals have the option to salary package up to $9,010 for living expenses and up to $2,650 for meal entertainment.
- Charities and Public Benevolent Institutions: Employees in this sector can choose to salary package up to $15,900 for living expenses and up to $2,650 for meal entertainment.
- Private Education and Rebatable Employers: These employees are eligible to salary package up to $15,900 towards living expenses on a concessionally taxed basis, and up to $2,403 for meal entertainment on a concessionally taxed basis.
In addition to these capped limits, employees may also be able to salary package additional benefits, such as a novated lease for a vehicle, work-related expenses, and other benefits that do not attract FBT.
Salary packaging allows you to save on income tax that you would otherwise pay on a variety of everyday expenses. Salary packaging reduces your taxable income so that you pay less tax, resulting in an increase to your take-home pay and more money in your pocket!
Based on your employer and the benefits you select; you may need to provide some documents such as a valid a tax invoice and proof of payments to start packaging.
Popular ways of claiming salary packaging benefits include:
- Ongoing/regular payments: This option is perfect if you have expenses that occur on a regular basis, such as mortgage/rent or utility bills.
- Salary Packaging Cards: This option allows you to have your salary packaging benefits loaded onto a card that you can use just like a regular debit or credit card. This is a great option for things like groceries or other everyday expenses.
- Reimbursement: If you’ve already paid for an expense out of pocket, you can submit a reimbursement request to get your money back. This option is great for work-related expenses or other one-off costs.
As salary packaging is a benefit provided to you by your employer, you will need to confirm with us or your organisation whether casual employees are eligible to salary package.