salary packaging to make your wealth grow

What’s the deal with salary packaging?

What is salary packaging?

Salary packaging, also known as salary sacrificing, is an arrangement between an employee and employer whereby certain items are paid for out of an employees pre-tax salary.Typical items include superannuation, cars, computers, electricity, etc.

 

Salary packaging acts as an extra incentive for employee attraction and retention. Essentially, it’s a little bonus scheme for employees as they can save on some of their tax obligations by paying for items at a reduced tax rate.

 

This works by your employer paying for the items you package before figuring out your tax. Therefore, your tax obligations are less as you have less gross income to assess.

 

For example, if your weekly gross income is $1000, then your tax would be based on an income of $52,000 per year. However, if you salary package a $2000 laptop, then your tax assessable income will be $50,000 or $961.54 per week.

 

How do I salary package?

How to salary package will vary depending on your employer. Firstly, you’ll need to find out from your employer if they offer salary packaging as an option. If they do, you’ll want to find out what you can salary package under your employers policy and if any of the options on offer are of interest to you.

 

Once you have this figured out, you’ll then need to find out who your providers are. If you have more than one option to choose from, do some research into which one you think you’ll prefer. Some things to think about in making this decision are: a difference in fees, reviews of the provider, ease of use of their website and/or app platform, etc.

 

Once you know you can salary package, what you want to package, and who to do it with, the “how” is pretty straight forward.

 

Firstly, make contact with your chosen provider and advise them of who you work for and what you want to salary package. They’ll send you some forms, including the fee structure to fill out and send back. In addition, you’ll need to provide some recent payslips to demonstrate your gross income.

 

Once you’ve done this, your provider will set up the rest with your payroll office on your behalf… And, you’re pretty much good to go!

 

What are the benefits of salary packaging?

 

There are a lot of benefits to salary packaging in Australia. As suggested above, the most prominent of these benefits is paying less tax.

 

However, one of the other great benefits is the ability to contribute to your retirement account at a substantially reduced tax rate.

 

Salary packaged superannuation contributions are taxed at the employer contribution tax rate, rather than your standard marginal tax rate. Here’s the difference salary packaging can make:

 

With salary packaging without salary packaging
Tax rate 15% 19-45%
Tax on $5000 contributions $750 $950-2250
Amount into superannuation $4250 $2750-4050

 

If you intend to do this, the one rule to keep in mind is that you can only make pre-tax contributions up to the concessional contributions cap (currently $25,000). Anything over this and your excess contributions will be subject to your marginal tax rate plus an excess concessional contributions charge. (Note: the $25,000 cap includes your employer contributions, as well as any additional contributions you make).

 

And the downside?

Fees

Like every service offered by a business, there are fees associated with salary packaging.

 

The fees you pay depend upon on who you salary package with, what items you package, and how many items you package.

 

For example, for me to salary package superannuation with my chosen provider, it costs $1.22 per fortnight. If I wanted to package a laptop it would cost $2.34. To salary package both of these items, it would cost $4.15 per fortnight.

 

Tax time bonuses

Due to recent tax changes here in Australia, people who make voluntary superannuation contributions post-tax are now able to claim these as a deduction on their tax return (see here for conditions).

 

However, this is not an option for pre-tax contributions, such as salary packaged super contributions, because you’re already receiving a tax break for these contributions through the application of the employer contribution rate.

 

If you are thinking about salary packaging superannuation only, make sure you work out the benefits of claiming post-tax super contributions as a tax deduction first.

 

If such a deduction would put you in a lower tax or HECs/HELP bracket… It would probably be best to avoid salary packaging this.

 

So, should I do it or not?

Ultimately, that’s up to you… Do your research and figure out if salary packaging is suitable to your circumstances or not.

 

To date, I salary package personal superannuation contributions of 5%. By making these contributions at the lower tax rate, I’m able to contribute 5% of my annual salary to my retirement and end up with almost the same net income.

 

Something that I would consider if you are young and haven’t had children yet is the difference that having children can make on the accumulation of superannuation over a lifetime.

 

According to QSuper, women are still 40% worse off than men at retirement age. Additionally, only 1 in 10 Australian women retire with enough superannuation of their own to fund a comfortable retirement.

 

Part of the reason is that women are still generally the primary caregivers to children and take time off work to raise children. During this time period, they are most likely not having money contributed to their superannuation account. Additionally, women are more likely to work part-time and earn less than men due to this caregiver role as well.

 

So, if you are yet to have children, but think you will in the future, it’s worth considering making extra contributions to your superannuation now to make up for the year(s) that you may lose your superannuation accumulation potential in the future… Salary packaging is just one of the ways you can do this.

 

What about novated leases?

Novated leases for cars is another popular salary packaging option. A novated lease is a three-way lease between an employee, employer and a finance/car company.

 

The lease is established through a Deed of Novation, which is an agreement allocating responsibility for something to someone else. In this case the agreement allocates responsibility for the lease onto the employer.

 

One of the benefits of a novated lease is negating the requirement to pay GST on a new car purchase.

 

I have never salary packaged a car through a novated lease and don’t plan to. But, several of my colleagues have and have given mixed feedback.

 

The positive feedback I have received is that it’s convenient, cuts costs on a new car through GST exemption and makes it easy to upgrade regularly.

 

The negative feedback I have received includes a lack of control over maintenance resulting in unecessary costs, difficulty getting things fixed if there are issues with the car, and an implied requirement to upgrade unnecessarily.

 

Conclusion

Overall, salary packaging is a great way to reduce your tax liabilities and get some bonuses along the way.

 

It’s easy, cost-effective and convenient. However, it may not always be the best option for your circumstances… So, do your research first and figure out what the financial incentive is of each available option.

 

Cheers, TFC.

 

Posted in Knowledge, Money Saving Tips and tagged , , , , , .

The Flawed Consumer is a Gen Y consumer that is on a mission to achieve wealth simply by changing spending and lifestyle habits.

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