An effective salary sacrifice refers to an arrangement between an employer and employee, whereby an employee agrees to forego part of their future salary or wage in return for some other form of non-cash benefits of equivalent cost to the employer. To be an effective salary sacrifice arrangement, the arrangement must be as follows:
- be entered into before the employee performs the work
- be between the employee and employer, and
- the employee no longer has access to the sacrificed salary.
Under this arrangement:
- the employee pays income tax on the reduced salary or wage,
- salary sacrificed (pre-tax) superannuation contributions are classified as employer contributions (not employee contributions), and
- the employer may be liable to pay fringe benefits tax (FBT) on the fringe benefits provided
Payroll tax applies to an effective salary sacrifice arrangement as follows:
- the reduced salary or wage on which the employee pays income tax is treated as taxable wages,
- the pre-tax superannuation contribution is classified as the employer contribution and is taxable,
- the taxable value of the benefit under the Fringe Benefits Tax Assessment Act 1986 (FBTAA ) is to be declared as a Fringe Benefit.
If the benefit provided is exempt from fringe benefits tax (FBT) (such as a laptop that is provided primarily for work purposes), no payroll tax is payable in respect of the amount sacrificed for that benefit. Payroll tax is payable only on a reduced salary on which the employee pays income tax.
Examples of effective salary sacrifice arrangements
David negotiates a salary sacrifice arrangement for a new car. David’s salary is reduced from $70,000 to $58,000 per annum because of the arrangement. Payroll tax is payable on $58,000 & the remainder will have a taxable value under fringe benefits. The fringe benefit taxable value for payroll tax of the salary sacrifice will be determined when calculating the total of the Type 1 and Type 2 aggregate amounts multiplied by the Type 2 gross up rate on the FBT annual return.
Stephanie negotiates a salary sacrifice arrangement for a $3000 laptop for work purposes. Stephanie’s salary is reduced from $65,000 to $62,000 per annum because of the arrangement. The laptop is exempt from FBT, therefore payroll tax is payable on $62,000.
Harold makes pre-tax (salary sacrifice) superannuation contributions of $5,400 per annum. Harold’s salary is reduced from $60,000 to $54,600 with his employer making pre-tax superannuation contribution of $5,400. Payroll tax is payable on $60,000 ($54,600 salary plus employer super contribution of $5,400). Superannuation contributions have the same value as the wage sacrificed.