Unlock the secret to boosting your take-home pay and enjoying more financial freedom with Driva’s ultimate guide to salary packaging in Australia.
What is Salary Packaging?
Salary packaging is when you and your employer 'package' your salary into income and benefits. This financial strategy can significantly impact how much tax you pay and the benefits you receive.
It's important for Australians to understand salary packaging and its affect on how they pay tax to maximise their income and benefits. Let’s unpack this a bit more.
Salary packaging is an arrangement between you and your employer, where part of your pre-tax salary is used to provide benefits, reducing your taxable income. By reducing your taxable income, you pay less income tax, allowing you to save money and enjoy more disposable income.
Starting to make a bit more sense? Salary packaging is also known as salary sacrifice, but the two terms have slightly different meanings.
For example, imagine you earn $80,000 a year, and you salary package $15,000 of it for a car lease. Your taxable income is now only $65,000, so you pay less tax.
Benefits of Salary Packaging
With salary packaging, you can lower your taxable income, reducing the amount of income tax you pay. As a result, you'll have more disposable income to spend on everyday living expenses or save for future goals. Not bad, right?
You can use salary packaging to cover costs like mortgage repayments, rent, or utility bills. Salary packaging can provide a de facto pay rise without your employer needing to increase your salary.
Real-life examples for salary packaging include but are not limited to:
- Taking a novated lease on a car
- Health insurance
- Taking on other forms of loans
- School fees
- Childcare fees
…And other personal expenses such as:
- Portable electronic devices
- Computer software
- Protective clothing
- Tools of the trade
Superannuation contributions can also be salary packaged to boost your retirement savings.
Types of Benefits in Salary Packaging
As mentioned above, fringe benefits in salary packaging include cars, health insurance, loans (usually for cars as well), school fees, childcare fees, and other personal expenses.
Exempt benefits, which are not subject to fringe benefits tax (FBT), include portable electronic devices, computer software, protective clothing, and tools of the trade.
Salary Packaging and Superannuation
Superannuation is a key aspect of salary packaging, as it allows you to make pre-tax contributions. These contributions can significantly lower the amount of income tax you pay.
Be aware of the contribution limits and tax implications when considering this option. For example, you could package $10,000 into your superannuation, reducing your taxable income and boosting your retirement savings.
Fringe Benefits Tax (FBT)
FBT is a tax paid by employers on certain benefits provided to their employees. FBT applies to some salary packaging benefits, so it's essential to understand how it might affect your package. Not-for-profit organisations may be exempt from FBT, allowing them to offer more attractive salary packaging options.
Salary Packaging Process
Your employer may offer specific salary packaging options, or you may need to negotiate the terms. Once the salary package is agreed upon, the benefits will be provided as part of your remuneration. You'll need to manage the benefits and ensure you're aware of any reporting requirements to the Australian Taxation Office (ATO).
Maximising Salary Packaging Benefits
To make the most of salary packaging, carefully choose the right benefit items that align with your needs and goals. Balance your salary packaging with your living expenses to ensure you're not overextending yourself.
Develop tax planning strategies to pay less tax and maximise the benefits of salary packaging. Examples include packaging a car lease, additional superannuation contributions, or even everyday living expenses.
Potential Risks and Downsides of Salary Packaging
Changes in personal circumstances, legislation, and regulations can affect the benefits and risks associated with salary packaging. Fluctuations in benefit values can also impact the effectiveness of your salary package.
Tips for Successfully Salary Packaging
To succeed in salary packaging, assess your personal financial goals and understand your employer's policies and offerings. Monitor and adjust your package over time, and seek professional advice if necessary.
Ready to Salary Package and Save at Tax Time?
Salary packaging can be a powerful tool for maximising your income and benefits. By understanding the various types of benefits, tax implications, and strategies involved, you can make informed decisions about how to best structure your salary package.
It's essential to stay informed about your employer's policies, legal regulations, and any changes in your personal circumstances that might impact your salary packaging arrangements.
Through Driva's commercial loan, you can get personalised loan quotes comparing 15+ Aussie lenders to help with your salary-packaged novated lease. You can rest assured that Driva helps you get personalised quotes with no hidden fees or impact on your credit score!
By carefully selecting the right benefit items and balancing them with your living expenses, you can enjoy the full benefits of salary packaging. Don't hesitate to seek professional advice to ensure you're making the most of this opportunity and always stay up to date with any changes in legislation or employer policies.
People Also Ask
What are the most common benefits included in salary packaging?
The most common benefits included in salary packaging are fringe benefits, such as company cars, health insurance, loans (usually for cars), school fees, childcare fees, and other personal expenses. Exempt benefits, like portable electronic devices, computer software, protective clothing, and tools of the trade, are also popular. The specific benefits available may vary depending on your employer and industry.
How does salary packaging affect my taxable income and take-home pay?
Salary packaging affects your take-home pay by reducing your taxable income, potentially leading to less income tax paid. By allocating a portion of your pre-tax salary to eligible benefits, you can increase your disposable income, allowing you to keep more money for everyday living expenses.
Can anyone participate in salary packaging, or is it limited to specific industries and job roles?
While salary packaging is available to many employees across various industries, it is more prevalent in certain sectors such as not-for-profit organisations, which enjoy fringe benefits tax exemptions. Ultimately, the availability of salary packaging depends on your employer's policies and offerings.
Are there any potential drawbacks or risks associated with salary packaging?
Potential drawbacks or risks associated with salary packaging include changes in personal circumstances, legislation, and regulations, which may affect the value or tax implications of your benefits. It's essential to carefully consider your financial situation and the benefits you choose to ensure they align with your needs and goals.
What are the reporting requirements for salary packaging on my income tax return?
Reporting requirements for salary packaging on your income tax return depend on the specific benefits you have included. Generally, you'll need to declare any reportable fringe benefits, which your employer will provide in a payment summary or income statement.
Additionally, you may need to report certain salary sacrificed superannuation contributions. It's always wise to consult a tax professional for accurate guidance on your unique situation.