What is salary packaging?
Salary packaging, or salary sacrifice, is an agreement with your employer to swap part of your future cash salary for benefits. Because the swapped amount is not part of your taxable income, you pay less income tax. The arrangement must be set up before you earn the income.
Who can salary package everyday expenses?
Only employees of certain FBT-exempt or rebatable employers can package general living expenses such as rent, bills and groceries:
- Public hospitals and public ambulance services: $17,000 grossed-up cap
- Public benevolent institutions (PBIs): $31,177 grossed-up cap
- Health promotion charities: $17,000 grossed-up cap
Employees of other employers, such as private companies, can package super contributions, a novated lease and some work-related items like laptops or tools.
What is a grossed-up cap?
FBT caps are measured by the grossed-up taxable value of a benefit, not the dollars you give up. For most packaged expenses the gross-up factor (Type 2) is 1.8868, so a $17,000 cap equals about $9,010 of actual salary.
Extra benefits: meal entertainment
A separate $2,650 grossed-up cap covers meal entertainment and holiday accommodation, which is roughly $1,404 of salary a year.
Reportable fringe benefits amount (RFBA)
If your grossed-up benefits exceed $2,000 in an FBT year (1 April to 31 March), your employer reports them on your income statement. RFBA is not taxed again, but it counts toward income tests including the Medicare levy surcharge, HELP and child support.
Pros and cons
Advantages
- Lower income tax, often 30 to 47 cents per dollar packaged
- Pay household costs from pre-tax pay
- Employer super is still calculated on your pre-sacrifice salary
Things to watch
- Provider admin fees can reduce the saving
- RFBA can affect income-tested payments and levies
- Lower taxable income may affect borrowing capacity with some lenders
- Changing arrangements mid-year is usually restricted
Keep reading: what you can package, salary packaging for nurses and RFBA explained.