Salary packaging: Overview, definition, and example
What is salary packaging?
Salary packaging, also known as salary sacrifice, is a financial arrangement where an employee agrees to receive part of their salary in the form of benefits or perks instead of cash. These benefits can include things like cars, health insurance, superannuation contributions, or electronic devices. The value of these benefits is deducted from the employee’s pre-tax income, which can potentially reduce their taxable income and lead to tax savings. Salary packaging is commonly used in many countries as a way to offer employees additional perks while maximizing their take-home pay by minimizing tax liabilities.
Why is salary packaging important?
Salary packaging is important because it allows employees to access a range of benefits that can improve their financial situation, while also reducing their overall tax burden. By receiving non-cash benefits, employees can enjoy the advantages of items they might not otherwise afford, such as higher superannuation contributions or a company car, all while potentially lowering the amount of tax they need to pay. For employers, offering salary packaging can be a valuable tool for attracting and retaining employees, providing them with competitive benefits that go beyond just cash salary. Salary packaging also helps businesses manage their payroll and reduce certain costs.
Understanding salary packaging through an example
For example, an employee agrees to enter into a salary packaging arrangement with their employer. They decide to package a portion of their salary to receive a company car. Instead of receiving the full salary in cash, part of the salary is directed towards leasing the car. As the car lease is deducted from the pre-tax income, the employee’s taxable income is reduced, and they pay less in taxes. The employee benefits from the car for personal and professional use, and the employer benefits by offering an additional perk that may help attract and retain staff.
In another example, an employee might salary package additional contributions to their superannuation fund. By directing a portion of their salary into their superannuation before taxes are calculated, the employee reduces their taxable income, which could result in lower personal taxes. This arrangement also helps the employee save more for retirement, while the employer benefits from offering a valuable financial benefit to the employee.
An example of a salary packaging clause
Here’s how a salary packaging clause might appear in an employment contract:
“The Employee may elect to salary package certain benefits, including but not limited to a company vehicle, additional superannuation contributions, and health insurance premiums. The Employee agrees that the total value of the benefits will be deducted from their pre-tax salary, and the Employer will process these deductions in accordance with the terms of this Agreement. The Employee acknowledges that salary packaging may impact their taxable income and overall tax liability.”
Conclusion
Salary packaging is an effective financial strategy for both employees and employers. It offers employees the opportunity to reduce their taxable income while enjoying valuable non-cash benefits such as a company car or increased retirement contributions. For employers, salary packaging can be a competitive perk that helps attract and retain top talent. By understanding how salary packaging works and its potential benefits, both parties can make the most of this arrangement to maximize financial outcomes.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.