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The benefits of salary packaging explained

Salary packaging – you may have heard the term bandied about in the media, around the water cooler or by your accountant. But what is salary packaging? And how can you benefit from the practice?

What is salary packaging?

Salary packaging, also known as salary sacrifice, means that you give up part of your monetary salary, in exchange for certain fringe benefits in the overall remuneration package you receive. In other words, an agreement is made between management and certain employees whereby the employee gives up an amount of their future salary in lieu of the employer providing benefits or items of a similar value.

Salary packaging is commonly used for items such as a vehicle, mobile phone, laptop and superannuation. Salary packaging can also buoy expense payments such as school fees and childcare costs.  

How can salary packaging help me?

This is beneficial for many reasons. Say you wanted to purchase a new car. If you earned a gross annual income of $100,000 (lucky you!) and wanted to pay weekly payments of $200 for the salary packaged car, this would mean you would only be eligible to pay tax on $89,600 of your total annual salary.

By doing this, you will have made large savings on the price of the salary packaged item. Essentially, you are spending the money that would have automatically allocated to tax.  

How much can I salary sacrifice?

For general purchase items, such as laptops and vehicles, you will need to check the terms and conditions of the industrial law, award, workplace agreement or employment contract which dictates your employee’s possible salary packaging caps. All staff within an organisation are subject to these laws. If no limitations are specified in these, there is no limit to the amount you can salary sacrifice.

For superannuation salary packaging, the regulations are stricter. For the past 2009-10 financial year, the concessional contributions cap (meaning, that employer contributions such as superannuation guarantee payments are included) was $25,000 and the transitional concessional contributions cap (for those over 50 years old) was $50,000.

The 2010-11 Federal Budget announced future changes to super contributions so, if passed in parliament, superannuation salary packaging conditions are subject to change.

How can I make sure my salary packaging arrangement is legal and airtight?

To ensure the arrangement made between you and your employer is effective, the following conditions need to be fulfilled.

  1. The monetary amount must be sacrificed. This means that any money cashed out at the end of the arrangement accounting period forfeits the tax withholding rates.
  2. Any agreement should be documented and agreed upon by both the employee and the employer.
  3. The arrangement should be entered before the employee performs any of the work under the salary sacrificing agreement. This means that all forms and relevant documentation is completed before the exchange takes place.

Remember, this area of accounting can be complicated so for peace of mind, speak to an accounting professional for advice on any proposed salary packaging.  

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Wednesday, September 15, 2010

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