A salary sacrifice arrangement is an arrangement between an employer and an employee, where the employee agrees to receive a reduced salary or wage in return for some other form of non-cash benefits of equal cost to the employer.
The non-cash benefits provided may include pre-tax superannuation contributions, the provision of a motor vehicle, a laptop or similar portable computer, car parking fees, payment of school fees or the payment of membership fees and subscriptions. Effective salary sacrifice arrangement is defined by the Australian Tax Office.
Under an effective salary sacrifice arrangement
- the employee pays income tax on the reduced salary or wage
- salary sacrificed (pre-tax) superannuation contributions are classified as employer contributions (not employee contributions) and
- the employer may be liable to pay fringe benefits tax on the fringe benefits provided.
For payroll tax purposes, under an effective salary sacrifice arrangement
- the reduced salary or wage on which the employee pays income tax is treated as taxable wages
- the pre-tax superannuation contribution classified as the employer contribution is taxable and
- the taxable value of a benefit under the Fringe Benefits Tax Assessment Act 1986 (Cth) is grossed-up by the Type 2 factor as shown on the fringe benefits tax (FBT) return.
If the benefit provided to the employee is exempt from FBT, payroll tax is payable only on the reduced salary on which the employee pays income tax, not the amount sacrificed for that benefit.
Some employees agree to make regular donations to charitable organisations of their choice under a 'Workplace Giving' program. This arrangement is not considered a salary sacrifice arrangement.
Examples
Show moreThe following examples outline the payroll tax treatment of various salary sacrifice arrangements
- An employee with a current salary of $70,000 per year negotiates with their employer for the provision of a car under a salary sacrifice arrangement. As a result, their salary will be reduced to $58,000 per year. The taxable value of the car for FBT purposes, grossed-up by the Type 2 factor, is $6,350. Payroll tax will be payable on the $58,000 salary and the FBT taxable value of $6,350.
- An employee's current salary is $65,000 per year. The employee negotiates with the employer for the purchase of a laptop computer under a salary sacrifice arrangement, reducing their salary to $62,000. As the laptop is exempt from FBT, payroll tax is payable on the $62,000 salary.
- As well as their current annual salary of $60,000, an employee makes aftertax (personal) superannuation contributions of $5,400 per year. The employee negotiates with the employer to replace the after-tax superannuation contributions with salary sacrifice (pre-tax) contributions. For the next financial year, the employee’s salary will be reduced to $54,600 with the employer making a pre-tax superannuation contribution of $5,400. Payroll tax is payable on both the salary and the pre-tax superannuation contribution.
