Salary Sacrificing
Salary sacrificing (often also called “salary packaging”) is an arrangement with your employer where certain items or benefits (aka ‘fringe benefits’) can be paid for out of your pre-tax salary. This is designed to legally reduce your taxable income, reducing the income tax you pay.
Salary Sacrificing Explained
The internet is full of websites extolling the virtues of salary sacrificing all manner of products and services, especially motor vehicles, superannuation and computers. Not all of these sites are impartial due to their commercial connections. Therefore, before proceeding, we strongly encourage you to read this authoritative educational content on the websites of the Australian Securities and Investments Commission and the Australian Taxation Office.
Salary packaging is paying for things before tax to reduce your income, so you pay less tax over all. Generally speaking, it is only beneficial when you are a mid to high income earner. Therefore, make sure you receive any proposal in writing and be clear about the tax savings, costs and other benefits that are claimed, before proceeding. You should also consider the impacts of having a lower after-tax pay on your ability to meet your day to day living costs.
Salary sacrificing is often sold on the basis of convenience and tax savings. However, it is not a free service. Therefore, we recommend doing your homework and understanding the costs of salary sacrificing include establishment fees, regular administration fees, built-in profit margins on vehicle financing and maintenance, transaction charges and limitations associated with using dedicated salary packaging cards (such as for fuel).
Defence's salary packaging provider is the company Smart (aka Smart Salary), whose role is to establish and administer salary sacrifice arrangements for all Defence members. Their website outlines the range of products and services that can be sacrificed through your ADF salary package. While there is a wide range of products and services that ADF members may access via salary sacrifice arrangements, there are two on which we receive most enquiries from members seeking further education and clarification, namely superannuation and motor vehicles.
Superannuation
Salary sacrificing into superannuation can be a tax-effective way of increasing your retirement savings. Even though salary sacrificed super contributions are taxed by the receiving superannuation fund at 15%, that’s probably much lower than your top (aka ‘marginal') income tax rate.
If you’d like to discuss your individual circumstances (including the limits on contributions that may be salary sacrificed), we recommend seeking a consultation with the Commonwealth Superannuation Corporation (CSC), with your own superannuation fund provider (if you’re not in a CSC fund), with Smart and/or with a professional adviser (there’s more on the latter below).
Motor Vehicles
A common fringe benefit ADF members package by salary sacrificing is motor vehicles, here are some considerations to think about before proceeding:
Overspend
It might be tempting to buy a large expensive vehicle when you really just need something to get you from point A to point B.
Financial commitment
You will be making a considerable financial commitment for the period of the lease (and after that), which may impact your ability to meet other expenses.
Interest rate
You may be able to negotiate a better interest rate with another financier/lender, so do your homework before committing.
Upfront discount
You may be able to negotiate a larger up-front discount if you approach car dealers yourself. The message, once again, is to do your homework.
Balloon payment
So-called novated leases have a large residual payment due at the end of the lease period. How will you fund this payment? If you need to sell the car and start again, are you setting yourself up to be on a continuous debt cycle?
Admin fees
You should understand the fees charged by the service provider for administration of the salary packaging arrangement.
Effect on other government benefits
How will this arrangement impact things like income support payments, family tax benefits or child support?
What happens at the end?
Should you leave your employer (Defence) before the lease ends, or at the end of the lease term, you will remain responsible for the car and for the financial obligations under the novated leasing contract. You can’t just hand it back.
Your options at that time will be to….
- Pay the residual (aka balloon) payment from your own funds and keep the car;
- refinance the residual into a standard car loan;
- trade-in or sell the car to pay out the residual value; or
- extend the lease through your new employer (if they offer novated leasing arrangements).
Fringe Benefits Tax exemption for EVs (Electric Vehicles)
This tax concession offers a considerable encouragement (potentially thousands of dollars) to those considering leasing of an EV through their package. But the threshold question is: do you need the new car at all? If the answer is ‘yes’, think about whether this incentive works for you and read this material from the Australian Taxation Office.
Salary packaging of motor vehicles can be tax effective for some people, but it pays to think it through thoroughly. Don’t guess at costs or benefits, take the time to gather accurate information and cost it out properly. The Moneysmart cars app may be useful in working out the real cost of buying a car, or you could use a spreadsheet or simply write it all out using pen and paper.
Take our Buying a Car Quiz
Whether you are buying a new or used car, test your knowledge on buying a car by taking our short quiz.
Buying a Car Guide
Understand the full cost of car ownership before you consider salary packaging a motor vehicle. From registration, insurance and stamp duty to financing and depreciation, there’s more to buying a car than the purchase price alone. For more general information, please see our buying a car guide.
Need Professional Advice?
Seeking professional advice before proceeding with an expensive salary packaged motor vehicle arrangement is a good way to properly inform and protect yourself.
So if you feel that you need some help, you could seek the advice of a qualified accountant/registered tax agent who may be found on these sites:
Alternatively, you could seek advice from a licensed financial adviser. Relevant links on the Centre’s website are:
What’s In A Name? Understanding Who’s Who In Accounting And Financial Services
A brief explanation of the somewhat confusing professional descriptors in the world of accounting and tax.
Frequently Asked Questions
In Australia, “salary sacrifice” refers to an arrangement where you (the employee) agree with your employer to give up (“sacrifice”) part of your pre-tax salary (that is, your salary before tax is deducted) in exchange for certain benefits (aka “fringe benefits”). As a result, a salary sacrifice arrangement may lower the total amount of persons income tax that you pay. However, this is not always the case, so make sure you get in writing how any arrangement being proposed will benefit you (and not just the provider of the service or product you’re thinking about, e.g., a car, superannuation, laptop). There’s a lot more about this subject on our website.
These terms are often used interchangeably, but there is a subtle difference. “Salary sacrificing” is the mechanism of giving up a part of your salary in exchange for a particular benefit (say a car), whereas “salary packaging” is the overall arrangement in which your salary and all of your benefits are “packaged” together. However, for practical purposes the answer to the question is “yes”.
The list of benefits is in the this link to Smart (aka Smart Salary). Smart is the Defence appointed salary sacrifice/packaging contractor for ADF members, including organising the deductions/interface with Defence payroll. If you decide to package any of the listed items, we recommend, before going ahead, that you understand the fees structure, the claimed tax savings and your obligations under the contract (especially with motor vehicles). You can read more about these issues on our website. For a comprehensive outline of Pay and Financial Benefits in the permanent forces, including salary packaging, see this link.
In a word, yes. But as with any contract, conditions and limits apply. Therefore, before going ahead, we recommend you should read more about this subject in the Defence Pay and Conditions Manual and in this article on our website.
