Salary Sacrifice

A salary sacrifice is an arrangement between an employer and an employee, where the employee agrees to forgo part of their future entitlements (such as salary or wages) in return for an employer providing benefits of a similar cost.

According to the Australian Tax Office (ATO), to get the benefits of salary sacrificing for both employee an employer, there needs to be an ‘effective’ salary sacrifice arrangement under which:

• An employee must forgo part of their future entitlements before the employee performs the work;

• An employee pays income tax on the reduced salary or wages;

• An employer may be liable to pay fringe benefits tax (FBT) on the fringe benefits provided to an employee;

• If the arrangement involves receiving super contributions in lieu of salaries or wages, these contributions are classified as employer super contributions (rather than employee contributions) and are taxed in the super fund.

TAX BENEFITS

Salary sacrifice can reduce an employee’s taxable income as the employer pays for certain goods and services straight from the employee’s pre-tax salary.

“Under a novated lease arrangement, the employer take over all or part of the lessee’s rights and obligations under the lease,” an ATO spokesperson said.

“This transfer of rights and obligations is agreed to in a deed of novation between the employer, the finance company and the lessee.

“The lessee is usually the employee, or an associate of the employee. The deed of novation usually contains a clause that transfers the lease obligations back to the lessee on termination of the lease or when the employee ceases employment with the employer.

“In the latter case, this enables the employee to enter into a new novated lease arrangement with another employer.”

Some employers in the education sector may be Public Benevolent Institutions (BPIS). PBIS are eligible to provide Fringe Benefit Tax exempt benefits to their employees.

For the years ending 31 March 2016 and 2017 these benefits are capped at $31,177 per employee.

BENEFITS FOR EMPLOYERS

Will the ATO could not provide specific financial advice about the benefits, a spokesperson did point out that a fully novated lease agreement can be treated as a tax invoice, provided it satisfies the information requirements for tax invoices.

“Where the arrangement does not involve the legal assumption of an employee’s obligations under the lease and is merely a reimbursement or payment by the employer on behalf of an employee, the employer may be entitled to claim GST credits,” the spokesperson said.

“The reimbursement is treated as payment for a purchase that the employer has made on behalf of an employee and the employer may claim GST credits even where they hold a tax invoice issued to an employee.”

EFFECTIVE SALARY ARRANGEMENT

To get the benefits of salary sacrificing for both employee and employer, teachers need to have an ‘effective salary sacrificing arrangement’.

“It is advisable that both employee and employer clearly state and agree on all the terms of any salary sacrifice arrangement,” the ATO spokesperson said.

“The contract is usually in writing, but may be a verbal one. If they enter into an undocumented salary sacrifice arrangement, there may have difficult establishing the facts of their agreement.”

SUPER CONTRIBUTIONS

“Salary sacrificed super contributions are considered employer contributions as long as it is under an effective salary sacrifice arrangement,” the spokesperson said.

“It is important to note that these are not fringe benefits when paid for an employee to a complying super fund.

“However, super contributions made for the benefit of an associate, such as a spouse, are a fringe benefit.

“Similarly, contributions paid to a non-complying super fund will be a fringe benefit.”

Teachers need to be aware of how entering into a salary sacrifice arrangement with their employers will affect them.

Refer to the ATO website for more information.