Salary Sacrifice Arrangements are also known as total remuneration packaging or salary packaging. It is an agreement between an employer and an employee in which the employee agrees to forego a portion of their future pay or wage entitlement to wage or salary. Our Melbourne Bookkeeper experts are highly equipped with the knowledge of salary sacrifice arrangements for employees.
Requirements for an Effective Salary Sacrifice Arrangement
Before you start working, you must set up a salary sacrifice agreement with your employer. It is possible that your agreement will be unsuccessful if it is not put in place until after you have completed the task.
Agreement Between Employee and Employer
- It is advisable by our professionals of bookkeeping for small business team that any salary sacrifice arrangement should be properly stated and agreed to via both you and your employer. The contract is normally written, although it can also be spoken.
- You may have difficulties demonstrating the facts of your agreement if you enter into an illegal salary sacrifice arrangement.
- Employees can renegotiate a salary sacrifice arrangement at any time, subject to the conditions of their employment contract or industrial agreement.
- You can renegotiate the amount of income or wages to be sacrificed before the start of each renewal if you have a renewable contract.
- Your wages, as well as any salary sacrifice arrangements, are detailed in your employment contract. It is recommended by our bank reconciliation experts that your contract can be modified if you and your employer agree.
No Access to Sacrificed Salary
For the duration of your agreement, you must permanently renounce the sacrificed salary. If a fringe benefit is not offered and is cashed out latterly in a salary sacrifice accounting period, the amount cashed out is considered salary and is taxed as ordinary income.
Similarly, our Melbourne bookkeeper suggests that instructing your employer to pay a third party from your earned wage does not constitute an effective salary sacrifice arrangement. These third-party payments are deducted from your salary after taxes.
An effective salary sacrifice agreement cannot include any salary and pay, leave entitlements, bonuses, or commissions earned before you entered into the arrangement.
Types of Benefits that can Be Included
There are no limits to the types of benefits you can forego. The crucial thing is that these benefits are included in your pay. They take the place of a wage that would have been paid otherwise.
Our bank reconciliation experts mentioned that employers commonly provide the following types of benefits as part of salary sacrifice agreements:
- Fringe Benefits
- Exempt Benefits
- Fringe Benefits
Fringe Benefits include various benefits to employees. For more advanced knowledge of fringe benefits, you can check our Fringe Benefits Tax section.
- Exempt Benefits
Various benefits of exempt from fringe benefits tax (FBT) are:
- A portable electronic device
- An item of computer software
- An item of protective clothing
- A briefcase
- A tool of the trade
- Items primarily for work-related use
- One item per FBT year for things that have a substantially the same function, except
- If an item is a replacement item
- More than one work-related transportable electronic device that small businesses deliver to employees in an FBT year– even if the devices have substantially comparable functionalities
Employer contributions include salary sacrificed super contributions made under an effective salary sacrifice arrangement. When paid to a conforming super fund for an employee, these are not considered fringe benefits.
Our bookkeeping for small business team’s experts said that contributions to a super fund for the benefit of an associate, such as your spouse, are considered a fringe benefit. Contributions to a non-complying super fund will also be considered a fringe benefit.
Implications of Entering into an Arrangement
As an employee, you should be aware of the implications of signing into a salary sacrifice agreement with your company. Consider the following example:
- You pay income tax on the reduced wages or salary.
- On the non-cash benefits granted, your employer may be liable for FBT.
- Certain benefits may be required to be reported on your income statement or payment summary by your employer.
- Your salary sacrificed super contributions are taxed and classed as employer super contributions rather than employee contributions in the super fund.