Salary Packages in Australia are an important part of any contract negotiation. The Australian Taxation Office provides a guide to setting up salary packages for employees in Australia. This article will walk you through the basics of how to set up salary packages in Australia, with some helpful examples.
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How does salary packaging work?
Salary packaging is when you agree to receive less money after-tax in exchange for your workplace covering certain benefits out of your pre-tax wage. For example, you might bundle a package for a salary of $90,000 so that you receive:
- $20,000 car in the package
- $70,000 as income
This reduces your taxable income to $70,000. You can save money by paying less tax.
One thing to note is, that you’ll need to sort out and agree on your salary packaging before you get paid. You can’t retrospectively work out a salary packaging bundle once you’ve already earned and received the money.
For individuals in the middle to higher salaries, salary packaging is typically more successful. To see whether salary packaging is appropriate for you, get expert tax advice. For example, not-for-profit salary packaging provider GO Salary has helped over 70,000 employees get the most out of their income.
Why Should You Salary Sacrifice
Salary packaging provides an important benefit – tax savings.
If your salary is $100,000, your employer will deduct around 36% in taxes for income tax & Medicare levy, leaving you with take-home pay of $64,400. If you are able to include the cost of your car within the bundle outlined above, you’ll only be taxed at personal income tax rates. It means that $20,000 out of your $100k will be taxed at 32.5%, and the other $30,000 will be taxed at 37%. Your take-home pay has effectively been reduced to $85,700 – a saving of around $2,000.
The Tax System in Australia
Australia has a progressive tax system which means that your income is taxed at different rates depending on how much money you make. The Tax Act states that when calculating the taxable income for an employee, there are two main categories: ordinary income and reportable fringe benefits. This article explores both these categories in more detail.
The first category is “ordinary income” which includes all types of earnings from employment or self-employment before deductions are made for any expenses incurred during the course of work (i.e., wages). Reportable fringe benefits refer to payments received by employees in connection with their employment, other than those included under “ordinary income”. Fringe benefits are considered taxable income in Australia, with different tax obligations depending on the type of fringe benefit you receive.
Benefits you can receive with salary packages in Australia.
You’re able to set up and package benefits you would otherwise pay for with your after-tax income, such as computers, automobiles, and child care, or prepare for retirement with super retirement. It is determined by your employer’s policy, and you still may be required to pay tax on your chosen package.
To all employees, most companies will provide salary sacrifices for super, but certain team members may not be allowed to package additional benefits.
Fringe benefits, exempt benefits, and super are the three types of advantages.
Some Fringe benefits you can package include: salary sacrificing for a car, dental/health insurance, personal or car loans, childcare & school fees, or other personal expenses.
In conclusion, there are many positive effects of salary packaging, including generating more take-home pay, enjoying tax benefits, and helping reduce anxiety regarding finances. Salary packaging is not for everyone. It should be considered to help you make better financial decisions.
To learn more about the benefits of salary packaging, including other fringe benefits (e.g., cars) and superannuation, make it a point to seek expert tax advice.
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