A salary sacrifice arrangement refers to an arrangement between an employer and employee whereby the employee agrees to forego part of their future salary or wage in return for some other form of non-cash benefits of equivalent cost to the employer.
The Australian Taxation Office (ATO) treats 'effective salary sacrificing arrangements' and 'ineffective salary sacrificing arrangements' differently. To be an effective salary sacrifice arrangement, it must:
- be entered into before the employee performs the work
- be an agreement between the employee and employer
- ensure the employee no longer has access to the sacrificed salary.
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)
- the employer may be liable to pay fringe benefits tax (FBT) on the fringe benefits provided.
Payroll tax applies to an effective salary sacrifice arrangement as follows:
- The reduced salary or wage on which the employee pays income tax is taxable.
- The pre-tax superannuation contribution is classified as the employer contribution and is taxable.
- The taxable value of the benefit under the Fringe Benefits Tax Assessment Act 1986 (FBTAA), grossed-up by the type 2 factor as shown on the FBTAA return, is taxable.
Under an ineffective salary sacrifice arrangement, the amount sacrificed is treated as salary or wages and payroll tax is payable on the total wage or salary.
If the benefit provided is exempt from fringe benefits tax (FBT), such as a laptop that is provided primarily for work purposes, no payroll tax is payable in respect of the amount sacrificed for that benefit. Payroll tax is payable only on a reduced salary on which the employee pays income tax.
Some employees agree to make regular donations to charitable organisations of their choice under a workplace giving program. This arrangement is not a salary sacrifice arrangement because the ATO requires the normal gross salary to be stated on the employee’s payment summary. Payroll tax is payable on the normal gross salary.
Examples of salary sacrifice arrangements
Example 1
Andrew’s salary is $70,000 per annum. He negotiates a salary sacrifice arrangement for a car under a novated lease arrangement. Andrew’s new salary is reduced to $58,000 per annum. If, for example, the taxable value grossed-up by the type 2 factor of the car for FBT purposes is $6,350, payroll tax is payable on $64,350 (i.e. $58,000 + $6,350).
Note: The example above is for payroll tax illustration purposes only. For current gross-up rates, contact the Australian Taxation Office.
Example 2
Beth’s salary is $65,000 per annum. She negotiates a salary sacrifice arrangement for a $3,000 laptop provided for work purposes. Beth’s new salary is reduced to $62,000 per annum. The laptop is exempt from FBT. Therefore, payroll tax is payable on the $62,000 salary.
Example 3
Carol’s salary is $60,000 per annum. She also makes after-tax (personal) super contributions of $5,400 per annum. Carol negotiates to replace the after-tax super contributions with salary sacrifice (pre-tax) contributions. Carol’s salary for the next financial year is therefore reduced to $54,600 and her employer will make a pre-tax super contribution of $5,400. Payroll tax is payable on $60,000 (i.e. salary of $54,600 plus employer super contribution of $5,400).
