Advantages of Salary Sacrifice

Sometimes being an employee seems to offer minimal tax breaks and limited rewards compared to individuals who operate a business to derive their income - enter salary sacrificing. Let's take a look at the advantages of salary sacrifice.

Salary sacrifice is a practice carried out by employers in agreement with employees where the employers reduce the amount of take-home pay which employees are entitled to in return for the employer to pay a nominated amount towards what the employee has specified. By doing this the employee effectively reduces their taxable income and thereby lowers the amount of tax that is required to be taken out of there salary by the employer and by doing so has the employer pay off generally a debt obligation, fees or an asset of some sort which the employee wishes to buy or pay.

Salary packaging or sacrificing is used as a recruitment and retention tool by employers that assists companies compete and retaining highly-skilled individuals which can be seen as adding value to a company. It is regarded as a compensation strategy holding benefits for employees and employers alike. Salary sacrificing is used frequently in public sector jobs and is one of the lures that make public sector jobs highly sought after. However, the private sector also is entitled to offer salary sacrifices and does so but more often this is available in larger companies.

Employers need to be aware that salary sacrificing can attract a different kind of tax which needs to be considered called fringe benefits tax. Fringe benefits Tax is incurred where the employer is seen to gain a financial advantage or benefit from their employer as remuneration for the services that they provide for example a car, accommodation, equipment or a cheap loan amongst other things. Fortunately, not all items which can be salary sacrificed incur fringe benefits tax for example a mobile phone, laptop, briefcase or a tradespersons tool amongst other items do not attract fringe benefits tax. Fortunately for the employee, they do not need to involve themselves in researching fringe benefits tax because it is the employer who needs to pay this and not the employee. For a comprehensive understanding of what a fringe benefit is visit the Australian Taxation Offices website.

In closing, salary sacrificing makes sense when an agreement can be reached between the employer and employee as there will likely be financial ramifications for the company. As this is the case the employer will need to look at the total value of the salary package and any fringe benefits tax that may be incurred in offering salary sacrifice to an employee. Generally speaking though if an employer is able to come to agreeable terms with an employee who in turn receives a robust salary package often this will induce a higher sense of job satisfaction which will usually lead to retention of the employee well into the future.