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:
Under an effective salary sacrifice arrangement:
Payroll tax applies to an effective salary sacrifice arrangement as follows:
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.
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.
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.
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).