So what exactly is it and how can you take advantage of this Australian Tax Office authorised way of restructuring your income?
Often called salary packaging, it provides a popular solution to make the most of your income through an approved arrangement that benefits employers and employees. It is where you can pay for a range of everyday goods and services at zero risk to your employer. For example, under a salary packaging agreement you can purchase items such as a car, a laptop or a mobile phone out of pre-tax pay. It means you can get a better deal on the item you want, lower your taxable income so you pay less tax and end up with more money in your back pocket.
Who benefits from salary sacrifice? Packaging is a proven legal method of increasing your net pay so it is more effective for people on mid to high incomes. However, anyone paying an income tax rate above 15 per cent can benefit.
What can you package?
The items you can purchase under a salary packaging agreement depend on your profession and the type of organisation you work for. There is usually no restriction on what can be packaged but for ATO purposes benefits fall into three categories: fringe benefits (FBT), exempt benefits and superannuation.
Fringe benefits: cars, property (including land and buildings), shares or bonds, and expense payments such as car loan repayments, school fees, child-care costs, home-phone costs and health insurance.
Exempt benefits: portable electronic devices, computer software, protective clothing, tools of the trade and briefcases.
Superannuation: Your employer already has to pay 9.5 per cent of your salary (from July 1, 2014) into your super fund, so topping it up via salary sacrifice will further aid retirement. The perk is the fact the tax on the super contribution is just 15 per cent on earnings (like interest) from the invested money. For example3, salary sacrificing $10,000 a year into super could reduce your tax by as much as $1500 on an income of $45,000.
With that in mind, consider the type of lifestyle you want in retirement. Next you’ll need to estimate the income required. This is where an Allied Investment Group adviser can assist. Once you identify how much extra is needed, compounding takes over to boost super savings. Of course, the earlier you start, the longer your investment earnings have to grow. Case in point, a weekly salary sacrifice amount of $20 results in a cash-flow loss after tax of $16.70 a week at the lowest tax rate, and $13.70 at the tax rate most people pay. Over a 40-year period, a person can put an extra $136,810 into super1. To put this into perspective, by foregoing about three big Mac meals a week, with the increased amount you will have in superannuation, you will be able to earn about an extra $156 a week in retirement.
Are there limits on how much you can salary sacrifice?
Given any salary sacrifice agreement must be entered into prior to the income being earned, before setting it up check what limits your employer has on the maximum amount you can sacrifice and whether they allow you to change or stop the arrangement whenever you want.
The first meeting with an Allied Investment adviser is free. This is where your needs are identified and you decide which service suits your current needs.
Next talk to Allied Investment Group to discuss how you can make salary sacrifice work best for you because if you exceed certain limits, called contribution caps, any contribution over this amount may be taxed up to the highest marginal tax rate plus Medicare levy, and an interest charge to recognise this tax is collected later than income tax. [From July 1 2014, the concessional contribution cap for the 2014-2015 financial year is $30,000 for people aged under 49 years, and $35,000 for members aged 49 or over.]
Allied Investment Group specialises in helping clients take control of their finances so they can have more choices, freedom and security in retirement. Call 1300 886 140 to put your plan in place.