What Is Salary Packaging?The packaging of salary can impact the value an employee receives from their total compensation. An employee can have some of the benefits paid from their pre-tax income rather than as regular salary.
By redirecting part of a pre-tax salary toward approved benefits or expenses, employees can lower their overall taxable income and potentially increase their net earnings. Utilizing an online pay calculator allows workers to estimate how different packaging arrangements affect their take-home income under standard tax brackets before committing to a salary sacrifice agreement. Evaluating these scenarios in advance provides a clear view of actual savings, ensuring that both employers and employees optimize the structure of a total compensation package.
In Australia, the most popular salary packaged benefits include extra super contributions and other work-related costs or a car. The specific benefits that are offered will depend on the employer, employee’s situation and the conditions governing the specific benefit.The concept is straightforward: Instead of focusing on the pay grade on a paycheck, take a broader look at the value of the overall job package.Understanding Fringe BenefitsFringe benefits are any benefit given to an employee by an employer that is not monetary. These might encompass a company car, private use of some vehicles, loans, expense payments and other benefits provided by the employer.Fringe Benefits Tax (FBT) may apply to some fringe benefits, and is usually paid by the employer, not the employee. But it doesn’t mean that workers are excused from the tax implications, either. Some fringe benefits may impact an employee’s reportable fringe benefits figure, and sometimes impact other income-tested benefits or obligations.That’s why the tax treatment needs to be considered before signing a salary package.Why do employees think about packaging?In certain cases, salary packaging may be helpful for tax purposes for some employees. Where packaging expenses are paid under a packaging arrangement, the employee may deduct the amount of salary from income tax if there are any eligible expenses.The benefit is largely dependent on the income of the person, employer plans and what type of benefit is being packaged. One approach that works for one employee might not work for another.One such scenario is where a member of staff is eligible for salary packaging but compares the after-tax expense if they paid for it personally versus under the salary packaging plan. The difference can show if the arrangement is really worth doing.There are many different types of benefits available, and choosing the right one is crucial.Not all benefits are suitable to be included in a salary package. The costs of the arrangements can be reduced by administration fees, restrictions, or tax consequences that may decrease the projected savings. Staff should not be fooled by the alluring headline number. Look at packaging costs, tax implications of the benefit and what to do if you lose your job early. Records should also be maintained and reviewed when circumstances change and it is also important to keep records. If the numbers change for a variety of reasons, such as a new salary, a new employer or a change in personal expenses, they will be different.Making the Strategy WorkThe first step in a good salary packaging strategy is to consider the individual employee’s situation, and not a list of benefits. Calculate the overall cost, know the tax implications and think about what it will really benefit you. If the numbers are right, salary packaging can make part of a regular pay package more attractive. If they don’t, a simple approach might be more effective.
